Chances are, you probably know what stocks are — but what about a stock portfolio? And more importantly, how do you go about building a stock portfolio?
What is a Stock Portfolio?
A stock portfolio is simply the bundle of stocks that you own. One of the cardinal rules of investing is diversification — or in other words, spreading out your investments among a group of different securities, including stocks. Building a stock portfolio is one of the best ways to achieve diversification.
If you follow a common stock index like the Dow Jones Industrial Average or the S&P 500, it might seem like the stock market is a single entity. For example, if the Dow or the S&P is up or down on a certain day, you might assume that the stocks you own are up or down by a similar percentage.
But there are thousands of different stocks and their performance can vary drastically. Building a well-diversified stock portfolio can help you reduce risk by spreading your investment dollars out among a variety of different stocks. So if one or more stocks fall in value, this can be offset by other stocks in your portfolio that rise in value.
Another way of putting it: Building a well-diversified stock portfolio helps you avoid putting all of your investing eggs in one basket.
Learn More: Beginner’s Guide to Portfolio Diversification
Building a Stock Portfolio
The key steps in building a stock portfolio are determining your investing goals, timeframe and risk tolerance level. These will be the main factors helping you decide which stocks to purchase for your portfolio.
Consider investing for retirement, for example. Depending on your age and when you plan to retire, your investing timeframe could be very long if you’re young or relatively short if you’re older. The longer your timeframe, the more risk you can generally afford to assume with your investments. This is because you’ll have more time to make up for potential short-term losses in your portfolio.
Conversely, if you’re older and/or nearing your planned retirement date, you have a shorter investing timeframe. In other words, you have less time to make up for potential short-term losses. In this case, you might want to choose less risky, more conservative stocks so you don’t have to liquidate holdings at a loss to meet retirement living expenses.
When it comes to risk tolerance, you must decide how much risk you’re comfortable assuming with your stock investments. If you lie awake at night worrying about losing money in the stock market, then you probably have a low risk tolerance level and might be better off sticking with more conservative stocks with less risk. But if you’re able to ride out periods of high market volatility with relative calm, you might be more comfortable adding riskier investments to your stock portfolio.
Types of Stock Portfolios
There are as many different types of stock portfolios as there are investors. But here are a few broad categories of stock portfolio types:
- Aggressive stock portfolio — This portfolio is designed to generate the highest potential return while also assuming the highest risk. In other words, this would be a high-risk, high-reward stock portfolio. An aggressive stock portfolio might contain the securities of startup companies in speculative industries like technology or energy, for example, or of overseas companies located in developing and emerging market nations.
- Defensive stock portfolio — As the name implies, this portfolio is designed to guard against heavy losses and high volatility. Defensive portfolios often contain the stocks of companies that manufacture consumer staples like food and beverages, furniture and appliances, and personal hygiene products. These tend to weather economic downturns and recessions well because people need them no matter how well or poorly the broader economy is doing.
- Income-focused portfolio — This portfolio contains stocks that pay dividends or make other types of distributions to shareholders. These dividends can be cashed out to provide income to investors or reinvested back into the company to purchase more shares and potentially boost returns. Real estate investment trusts (REITs) are one type of income-focused stock portfolio.
- Growth-focused portfolio — Unlike an income-focused portfolio that pays dividends, a growth-focused stock portfolio contains the shares of companies that are expected to grow faster than the overall stock market. However, this growth isn’t guaranteed so growth-focused portfolios usually lean toward the riskier side than income-focused portfolios.
- A speculative portfolio — This is similar to an aggressive or growth portfolio, presenting high levels of both risk and reward. Speculative stocks may include initial public offerings (IPOs) and companies that might be takeover targets in industries like high-tech and healthcare — especially companies focused on developing breakthrough new products and technologies.
Tracking Your Stock Portfolio
Once you’ve built a stock portfolio, you’ll want to identify the best method for tracking the stocks held in the portfolio. There are several different ways to track your stock portfolio:
- Online tracking — Online stock portfolio trackers let you plug in the number of shares you bought and how much you paid for them. They can then update the value of your stock portfolio in real time based on current stock quotes. You can also set up email and text alerts to stay on top of breaking news affecting your stock portfolio.
Digital personal finance tools like Personal Capital’s free dashboard allow you to track not only your stock portfolio — instead, you can see all of your financial accounts in one secure dashboard. You can track your spending, create long-term financial goals, and spot hidden fees in your investments with the Fee Analyzer.
- Tracking using software — There are a number of desktop software programs that let you track your stock portfolio. Some of them offer features you can’t find with most online stock portfolio trackers. QuickBooks, Quicken and Fund Manager are a few of the most popular software stock tracking programs.
- Tracking using spreadsheets — Similar to software programs, there are spreadsheets you can load onto your desktop or laptop computer to track your stock portfolio. Microsoft Excel and Google Spreadsheets are two of the most commonly used spreadsheets for stock portfolio tracking.
Building a well-diversified stock portfolio is one of the keys to successful investing. So spend some time thinking about your investing goals, timeframe and risk tolerance level in order to build the right stock portfolio for you.
Also be sure to check out Personal Capital’s Investment Checkup tool. This tool enables you to:
- Monitor the performance of your stock holdings
- Assess your level of risk tolerance
- View a target asset allocation based on your risk and investing time horizon
- Compare your current portfolio allocation to your ideal target allocation
Personal Capital compensates Don Sadler (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.