Contents
Stock Investing Basics
Types of Stock
Stock Indices
How to Determine Your Level of Risk Tolerance
How to Plan Your Stock Portfolio
How to Research Stocks
How to Buy and Sell Stocks
How to Manage Your Stock Portfolio
Stock Investing and Taxes
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How to Manage Your Stock Portfolio
Once you’ve built a stock portfolio that matches your investment goals and risk tolerance, you should monitor and maintain it on a consistent basis. You should expect some of its components to thrive as others wane over time; therefore, you’ll need to adjust the components accordingly.
Rebalance Periodically
The process of adjusting your stock portfolio is called rebalancing. Its purpose is to ensure that your portfolio is best positioned to minimize risk and maximize returns as major changes take place in your life, in the economy, or in the stocks you own. You should not compulsively rebalance every week or every month, as doing so will waste money in commissions and other transaction costs. Instead, consider rebalancing your portfolio every year or so, or when any of the following events occur:
- Your financial goals change: Your goals will likely change as you age and as you begin to adjust your risk tolerance to favor income over growth, for example. A major life event, such as a new home, a new job, or a new baby, may also cause goals to change.
- The economy (and the stock market) shifts: As the economy moves between expansion (growth) and recession (contraction or no growth), the stock market inevitably follows. You may wish to rebalance to reduce your risk in anticipation of a recession or to boost your chances for growth before an expansion.
- Stocks in your portfolio experience significant price changes: If a stock you own increases in price by a significant amount, it will constitute a larger portion of your portfolio than it did before. You may consider selling at least a portion of it and moving into other stocks, both to safeguard your profits and to remain diversified.
Stick with Your Investment Plan
As you manage and rebalance your portfolio, be careful to stick to your investment plan. Perhaps the greatest risk most investors face is their own vulnerability to two very powerful innate forces: greed and fear.
Avoid Greed in Stock Investing
Greed leads investors to chase market trends and ignore the need to do research and assess a stock’s fundamentals. The most recent example of this type of greed-gone-wild occurred in the late 1990s, when investors eagerly snapped up internet stocks with no earnings or triple-digit P/E ratios, building up a stock market bubble that soon burst, taking many portfolios down with it. Follow these guidelines to avoid investing based on greed:
- Determine your financial goals and stick to them by maintaining a diversified portfolio.
- Ignore fads and “hot stocks” in the press that might inspire you to veer from your objectives.
- Don’t buy a stock (or invest more in a stock you already own) simply because its price is going up.
- Do the research required to assess a stock’s current fundamentals, even if it’s a stock you already own.
- Plan ahead the prices at which you plan to sell specific stocks, then sell them once they reach those prices.
Avoid Fear in Stock Investing
Fear leads investors to panic and sell stocks that they shouldn’t sell. The stock market generally overreacts to any seemingly negative news about a company, as panicked investors ignore the fundamentals and flee the stock. But if a stock’s fundamentals haven’t changed, don’t sell it. Try to keep fear completely out of your decision-making:
- Invest for the long term: At least one year; preferably five years or more. Establish specific price targets and time horizons for each position.
- Monitor fundamentals: Watch the numbers to ensure your original reasons for buying the stock are still valid.
- Consider selloffs an opportunity: Ignore media hype about selloffs; see them instead as a chance to buy stocks “on sale.” As always, research before you buy.
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