By Nicole Dugan
If you have just started out on your investing journey, you may be unsure of the best way to build your portfolio. Perhaps you haven’t even executed your first trade yet. As a new investor, how do you know what to invest in? Here are 5 tips to help you start building your portfolio.
Don’t be a Stock Picker, be an Investor
Many financial advisors will suggest that individuals start investing in ETFs before they move on to individual stocks. ETFs give investors exposure to multiple sectors, asset classes, and companies through a single instrument. For example, if an investor wants to invest in technology, he or she can buy an ETF that will give him or her exposure to the entire US technology sector. Investing through ETFs makes it easier for first-time investors to construct diversified portfolios. Before you start investing in ETFs, make sure to check the prospectus, located on the ETF provider’s website, so that you know exactly what companies the ETF is invested in.
Start Investing in What You Know
If you want to invest in individual stocks, start by looking at the companies you know. If you are continually consuming certain products and brands, there must be a reason. Why not own pieces of those companies?
Don’t Try to Beat the Market
Don’t get wrapped up in picking the next big winner. Instead, make sure you know how companies make money and how they plan to expand and grow in the future. Keep up to date on news items related to stocks you are investing in or are thinking about investing in. Remember, you don’t want to get sucked into the next “dot com bubble.”
Price Isn’t Just a Number
A good metric to look at when evaluating a stock is the P/E ratio (price to earnings ratio). This is a measure of a company’s price relative to its earnings. The P/E ratio of a stock can help you determine whether a stock is undervalued or overvalued. Generally speaking, the lower the P/E ratio the better. A common threshold used by investors is a P/E of 20 or less, however, investors should compare P/E ratios to that of other companies in the same industry. Some industries, like the Restaurant industry, historically have P/E ratios higher than 20, so it’s important to compare companies to their peers when assessing their value.
Investors should note that P/E ratios can be a valuable tool, but they don’t tell the whole story. Before investing in a company, investors should understand the company’s plans for growth and their revenue stream.
Diversify, Diversify, Diversify
Diversification may be the most important part of building a portfolio. The idea is to spread your investments across multiple asset classes, sectors, and even geographic locations to help lessen volatility in your portfolio. For example, if you are invested in technology, consumer goods, and healthcare and the consumer goods industry underperforms, you’re entire portfolio won’t be impacted because you are also invested in healthcare and technology. If you had invested all your assets in consumer goods, you would be more affected by volatility in that industry,
Oldies can be Goodies
Many people want to invest in the hottest stock, but don’t be afraid to invest in stocks of companies that have been around for the while. They may not be poised for growth, but often, these companies pay dividends and are relatively stable investments.
Start Investing with the Right Mind Set
As you begin to build your portfolio, remember to think like an investor, not a speculator. Think about the companies and industries you consume; follow them in the news and ask yourself if you want to own part of that company.
All investing carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country’s currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises.
Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.
Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing.