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Building Your Own Stock Portfolio
How to Select An Investment. Here are some tips on how to narrow down your
selection of investments.
CDs – Choose your time horizon. Then find the CD closest to that time horizon
with the highest rate. Shop around at your local banks or through your brokerage
account.
Money Market Accounts – Offered by banks and brokerages. Choose between
tax-free and traditional accounts. Then look for the highest rate. Tax-free
accounts are more beneficial if you are in a very high tax bracket, but they pay
a lower interest rate.
Stocks – Picking individual stocks is the riskiest method of investing. If
you are just starting to invest, you should probably start with stock mutual
funds. However, it doesn’t hurt to add a small percentage (never more than 10%
of your portfolio per single stock) of individual stocks to your account. Doing
so will likely increase your participation level and interest in the stock
market. To pick individual stocks, use a variety of tools, many of which are
offered through your online brokers. Find companies that you know something
about and that have a good reputation. Then, read about the company and learn
about their business. Try to get your hands on some research reports to learn
what other people think (but remember that research reports are wrong as often
as they are right). Look for long-term trends that will benefit the company you
like. Always invest for long-term reasons and don’t ever buy a stock simply
because it is popular or because you think you know something others don’t. As a
previous research analyst, I can safely tell you that every time I knew
something that the rest of the market didn’t know, I was wrong as to how the
stock would react to the news. Basically, I’m saying that you can’t predict the
short-term fluctuations of the stock market or of individual stocks. The best
way to invest is to find long-term, sustainable business trends that you can
invest in, and then to hold your investment until you think those trends are
changing. A great way to find stocks to read is to subscribe to a magazine that
offers opinions and spells out their business models (try Smart Money or
Kiplinger's) . Also, word of mouth works to give you ideas, but don’t be too
hasty acting upon other people’s ideas. Quite often they are just repeating
something they heard from their broker, or from a friend of a friend of a
friend.
Mutual Funds – Use the tools from your broker, or other sites like Yahoo
Finance or Motley Fool, or even magazines like Money Magazine to learn about and
compare different funds. Find a fund in the risk category you are comfortable
with (capital preservation, income, growth, aggressive growth) that has
demonstrated at least market average returns over the past. It also makes sense
to go with funds from companies that you’ve heard of before (like Strong, Janus,
Putnam, Fidelity). These companies will likely be in business longer and often
attract better portfolio managers than other funds. Also, remember that previous
results are not indicative of future results. High flying funds often falter for
years afterwards, and the top performing funds often come from previously under
performing managers. To find out if a fund is right for you, read their
prospectus, which can be found on the website of your online brokerage, on the
website of the fund company, or through request from your broker or brokerage.
Look at the quality and experience of the managers of the fund, their investment
philosophy, and the list of the top stocks held in their fund (all of these are
required to be reported in the prospectus). Also, look at the fee structure of
the fund. An average management fee shouldn’t exceed a few percent a year. Also,
some funds charge you extra fees to purchase or sell their shares. Stay away
from these funds. And most importantly, don’t fret too much about which fund you
are buying, and when you buy it, and try not to be too critical of its
performance. Give it some time before you judge its results. If it’s not working
out a year from now, then consider buying a different fund. For more
information, see our section on mutual fund
investing.
Bond Funds – Search for a bond fund the same way you search for a stock
mutual fund. I wouldn’t recommend buying bond funds unless you are nearing
retirement, or unless you have a very large portfolio that you need to
diversify. When buying bond funds, look at the duration of each fund. Find out
whether it invests in long-term, short-term, or medium-term bonds. Use your
online broker’s tools (or Yahoo Finance) to look at their historical returns
versus other funds. Look for good brand names and read the fund’s prospectus to
determine if it is right for you.
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