Picking Stocks begins with Assessment of Need

Picking stocks has never been easy if done correctly. Some investors thought they had the talent during the boom, but that popping bubble revealed lucky guesses instead of investor insight.

If you apply yourself, it is possible to improve the odds that the stock you pick will be a winner, at least for a reasonable period.

There are few, if any stocks, I would say fall into the “buy it and forget it” category any longer.

The world and the market are changing too fast for investors to become too comfortable.

Your first step in selecting a stock for your portfolio is to see where there are gaps (if you’re just beginning, then pick a stock that is appropriate for your age and risk tolerance).

Build It Yourself Portfolio

A build-it-yourself portfolio (as opposed to owning a basket of mutual funds) should cover the major asset categories. These include:

  • Large cap stocks
  • Mid and small cap stocks
  • Growth stocks
  • Value stocks
  • Foreign stocks
  • Mid-term bonds (no longer than 10 years to maturity)
  • Cash

The stocks should come from a broad selection of non-correlated industries.

What percentage of your portfolio is in each category depends in large part on your age and risk tolerance.

Generally, younger investors can afford more risk, so their portfolio should be weighted heavier with growth and small cap stocks.

These stocks are volatile, but offer the opportunity for significant gains (they also offer the possibility of significant losses).

Older Investors

Older investors usually are more conservative in their selections with emphasis on less volatility and current income.

Where you are in life will determine how you mix your stocks, bonds and cash. Some investors will want to broaden this basic list to include real estate, precious metals and other investment categories.

The important point is to find a mix that works for your age, financial goals and risk tolerance.

Once you have an idea of the proper mix, you can begin looking for investment opportunities in those areas where you need assets deployed.

Tweaking your portfolio should only occur when there is a significant change in your financial goals or there is a major change in one of your investments.

You can usually keep things in proper perspective with a quarterly review - although you should stay on top of news concerning the economy and your individual stocks. (By Ken Little)