Investing in the stock market is one of the best ways to create wealth over the long term. However, to be able to successfully do so, you’d have to indulge in a bit of portfolio management. Creating the right stock portfolio is extremely crucial since it can effectively help reduce the overall investment risk. If you’re wondering how to build a stock portfolio, this article is for you. Let’s take a look at some of the key things that you should consider.
To build an investment portfolio that generates consistent returns, you have to concentrate on the following four factors.
1. Your goals
Determining your goals is the first step to creating a stock portfolio. It is important to first know what your end goal is before you try and compile a portfolio. This way, you can ensure that your investments work towards bringing you closer to your goals. For instance, if you’re a 25-year old individual who’s planning to purchase a home in the next 10 years, creating a portfolio of growth stocks may just be the right way to go.
2. Asset allocation
Once you’ve determined what your goals are, the next step is to allocate assets accordingly. For this step, you would also need to assess your risk profile and tolerance. This will allow you to make more informed decisions. For instance, say you’re planning for your retirement 20 years from now. Also, you’re a moderate investor with moderate risk tolerance. In this case, you would do better to have an asset allocation ratio of 80:20 split between dividend stocks and growth stocks.
And finally, a portfolio is not a good investment portfolio if it hasn’t been diversified. A Diversified Portfolio allows you to spread your investment risk across multiple asset classes or subclasses. By doing so, you can effectively reduce the risk significantly. For instance, in the previous example, you’ve basically made an asset allocation of 80:20 in favour of dividend stocks and growth stocks, right? You can diversify it even further. How, you ask? By splitting your 80:20 investment in dividend and growth stocks across multiple sectors and market capitalization.
Now that you know how to build a stock portfolio, go ahead and try it for yourself. But before you do, make sure that you have a trading and demat account. If you don’t have one already, get in touch with Motilal Oswal immediately to open a demat account and a trading account now.