If you are considering investing in stocks, you might be wondering how to build your portfolio. A portfolio is a collection of different investments, such as stocks, commodities, bonds, and more. When creating a stock portfolio, there are some things you need to know and consider to ensure you end up with a profitable one.

Know Your Risk Tolerance

Every investment comes with an inherent risk, and we are all comfortable with different levels of risk. Risk is the chance that you will lose money as an investor. How much are you willing to lose, and how much risk are you willing to take?

All stocks have different risk levels. For example, penny stocks have a high risk because the companies behind them are more likely to go under. On the other hand, blue-chip stocks have a lower risk because robust and successful companies back them.

Do understand that risk and reward are interlinked; higher risk typically leads to higher returns when everything works out, and lower risk often results in lower returns. How aggressive you are and the amount of risk you can accept will determine the types of stocks you include in your portfolio.

Understand Your Goals and Set a Time Horizon

Investment goals are what you want to achieve with your investment. Some people want to build wealth, some want to put together investments that will help them retire early, while some want to create an estate that their beneficiaries will inherit. Regardless, having investment goals is crucial as it can help you chart a roadmap and give you purpose.

Once your goals are written down, put them in categories depending on your time horizon. In investing, the time horizon is how long you want the investment to remain active until you need the money. Most people sell their stock at the end of their time horizon.

Types of Stocks to Include in a Stock Portfolio

When putting together a stock portfolio, you should consider the types of stocks you could add to it. There are different types of stocks; priority, common, mid-cap, small-cap, large-cap, dividend, and growth.

You should also consider whether you want to invest in single stocks or ETFs. The main benefit of investing in single stocks is having much more control over your portfolio. You can pick which stocks to include and which ones to exclude.

On the other hand, exchange-traded funds (ETFs) comprise a collection of stocks from companies that meet specific criteria. For example, one ETF could contain stocks of companies in the tech industry, while another might contain those of the largest companies in a country. They give you better market exposure while reducing risk, as they are an excellent diversification option.

Regardless of the choice you make, always consider the dividend payments. Both single stocks and ETFs can issue monthly dividend payments depending on the stocks chosen. The dividend ensures a continuous return on investment through these monthly payments.


Create Your Asset Allocation

If you decide to invest using an ETF, the asset location will be done for you. You only need to check the details of the EFT to find out which stocks it includes. If you are building the stock portfolio yourself, you must allocate the assets. Doing so includes deciding which types of stocks to invest in and what proportion of your investment to allocate to them.

You can also build a structure similar to an EFT where you invest in stocks from different sectors, with your allocations going to the categories you have created instead of individual stocks. Doing so will give you broad exposure to the overall market while also helping diversification that helps you hedge against inflation and reduce risk.

Choose the Right Account

At this point, you should know the stocks you want to invest in. Before you do so, you need to pick a place to put them. The investment account you choose should align with your goals and horizon. A tax-advantaged account such as a 410(K) or an IRA is best for long-term investments for those building wealth for retirement. An online brokerage works best for mid to long-term goals, while deposit accounts work well for short-term goals.

Monitor, Rebalance, and Adjust

It is a bad idea to leave a portfolio alone for an extended period unless someone else actively manages it for you. Your stock portfolio will need a lot of attention so you can know which stocks are doing well, which ones are not and thus need to be removed, where to allocate more funds, and so on. Once you have created a successful portfolio, you can use this formula to create a portfolio of other investment options.

Investing in stocks is an excellent option for people new to investing. While doing so, you can build a portfolio of either individual stocks or ETFs that help you maximize returns, minimize risk, and hedge against inflation.

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