Are you interested in creating a stock portfolio but have no idea where to start? This is a guide breaking down the steps on how to create an investing Plan. Having an investing plan takes the emotion out of investing and gives you clear guidelines on how to maintain your portfolio.
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Have clear objectives
Understand what type of portfolio you are creating. The types of stocks you select will be based on these goals. Are you a value, income, or growth investor? You don’t have to choose just one. It’s just important to understand the difference between them and have metrics for each type of investment strategy.
Ask yourself the following questions:
– What investment approach will you take with your portfolio? (Ex: 50% Growth; 50% Income)
– In what way will you measure your performance?
– How will you select your stocks?
– How often will you purchase stocks?
– What will be your asset allocation for each investment type?
– When will you enter or exit a position?
– How often will you monitor your portfolio?
Investment Strategy
The allocation of your portfolio will be based on your goals. This is typically associated with your age, time-horizon, and risk tolerance. If you are more focused on wealth preservation you will probably choose a more conservative portfolio. If you are young and have a lot of time for your portfolio to grow, you may choose to be more aggressive with your asset allocation.
Break down of each investment strategy:
Growth Investing – Investing in companies that have potential to be high performers in their industry. Since the stock is typically growing at a faster rate than more established companies, these stocks don’t typically offer a dividend.
Income Investing – Investing in stocks, REITS or bonds that offer a payout on a consistent basis. The stocks are typically established companies that can afford to allocate part of their profits to their shareholders. Income investing is a great way to create a passive income stream.
Value Investing – Investing in companies where the price of the stock is undervalued based on fundamental analysis. Warren Buffet says that the essence of value investing is buying stocks at less than their intrinsic value.
Benchmarking
While it is not required, people often use some index to compare how their portfolio is performing. For example, you could analyze your portfolio against the S&P 500. If you have your own unique mix of investments this is a way of being able to see if you beat the market. You can also compare your asset allocation to the index. This can highlight different things in your portfolio like the following:
– Are you over exposed to a specific industry?
– Are you only invested in large cap stocks or do you have a mix?
– What is the geographic makeup of your stocks? Are you invested in international stocks or only domestic?
– What percentage does each of your positions make up in your portfolio?
Having a Watch List
Based on the investing strategy you choose, you will need to build out your watch list. Your watch list is a list of stocks that aligns with the criteria of stocks you want in your portfolio. The objective with having a watch list is to start big then narrow down what works best for you.
You can create your watch lists based on industry, performance ratios, dividend payouts, and much more. If you ever need to sell off a position, you have other stocks already lined up to take its place since you have already done your research.
Purchase Frequency
How often you choose to buy stocks is totally based on your preference. Since most fees have been eliminated with major brokerages, there are not as many costs associated with buying or selling more frequently. Some people are not as concerned with the price they pay because they dollar cost average. Others with shorter time horizons want to make sure that they are getting the best price and may be more selective of when they choose to buy.
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Asset Allocation
It is important to diversify your holdings so that you do not expose yourself to too much risk. For example, if you love one particular stock and 80% of your portfolio is in this one stock you could incur major losses if something were to happen with this company. I try not to let any particular stock get above 10% of my overall portfolio. Remember that you need to take into account the stock going up in price. Depending on your benchmarking techniques you may need to sell off some of your position into other holdings to rebalance your portfolio.
Entry and Exit Rules
You should have clear entry and exit rules based on your investment strategy. Entry and exit rules are parameters for when you will buy or sell a stock. Long-term investors typically only need exit rules since they want to hold the stock as the price increases.
Most brokers will allow you to set up alerts once a stock reaches a certain price or a rolling limit order to enter a trade once it reaches a certain amount. If you are concerned about losing money due to the price dropping, you can create a stop trade to mitigate your loss.
Your exit point should be based on your risk tolerance. You don’t want the exit point to be too high or else you could sell out of a position too early. The stock could recover and you could miss out on an opportunity. If you sell too late, you could incur deeper losses.
Management Frequency
Determine how often you will monitor your investments. This could be daily, weekly, monthly, or quarterly depending on your portfolio. It is really important to set up rules for how often you check your investments. You can drive yourself crazy if you look at your portfolio too often.
I know people who are watching the ups and downs of their portfolio all day every day. Remember that investing is a passive form of income. Once you do the work up front you should be able to enjoy the benefits. If you are constantly checking your portfolio not only can this cause extreme anxiety but it is not a good use of your time.
Have clear reasons for why you are checking your portfolio. Here are some examples:
– Checking the stock price for the day
– Checking the news regarding the stock
– Review analyst reports
– Perform benchmarking analysis
Wrap Up
By having an investing plan, you can invest with confidence. Having a plan requires you to set clear metrics and have specific objectives for your portfolio. This means that you won’t just be buying a stock that you see has been going up and just hope that it works out. You will have done the research and know what steps to take if you need to take an alternative approach.
What type of investor are you? Let me know in the comments!
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
