Every investor begins their first portfolio nervous and not knowing very much. If you have a desire to learn the basics, however, and are committed to constantly improving your knowledge base, over time you will have a portfolio of stocks (and perhaps other financial instruments) that you are happy with and confident in. Below are four tips for building your first portfolio.
Consult the Experts
While you should always do your own due diligence any time you invest your money, there is always someone with more information and better insights than you out there. When you are just starting out and building your portfolio, anyone who has been doing it longer is very likely someone you could stand to learn a thing or two from.
Thanks to the internet, there are now more options than ever to see inside the minds of some of the world’s most successful and experienced investors, either by following them on social media or subscribing to their analysis, advisory and stock picking services. Even if you don’t follow their advice all the time (or at all) you gain valuable insight into how they evaluate their picks and how you can apply their metrics and criteria to your own picks moving forward.
Determine Your Appetite for Risk
When investors and financial services professionals talk about someone’s appetite for risk, what they are referring to is how comfortable an investor is with the risk that they might lose some or all of their capital. A wide range of factors determine what your appetite for risk is or might be. Your age, experience, income and ability to handle the stress of investing all come into play.
Spend some time pondering these things when deciding on what assets you want to include in your portfolio. An older person nearing the age of retirement is likely going to be unwilling to make the same kinds of risky bets a single, gainfully employed 30-year-old is. A person investing some of their life savings is going to be more worried about taking a loss than someone investing their disposable income. Different stocks come with different risks.
One of the fundamental rules of investing and building a portfolio is that you want to diversify your investments across a variety of asset classes and industries so that you are not overexposed to the misfortunes of any particular one. If your portfolio is tech-heavy, or overly weighted with a single precious metal, a market downturn in either of these areas will have a disproportionate effect on your total holdings. If you are just starting out, it is a good idea to begin by reading some of the many popular books explaining these concepts.
Explore the Simulators
While the modern markets are almost unrecognisably more sophisticated and complicated than the pre-digital-era ones were, the major upside of just starting your investor journey in the 21st century is that you have more information and learning opportunities than ever before in the palm of your hand. One of the best methods to get a feel for investing and how to start putting together a portfolio is to use one of the many investment simulators out there. Most are completely free and when you sign up for a brokerage account with a financial institution, they usually have their own proprietary simulator that will give you fake money to play around with, allowing you to observe how investments work and behave in real-time.
Once you build your first portfolio, it will rarely be set in stone. Over time, your appetite for risk will change, your confidence in your ability to read and anticipate the market will improve and your knowledge of general investing and financial analysis principles will allow you to make more informed decisions about what to include in and exclude from your portfolio. Keep the above tips in mind when starting out and create a sound portfolio you are happy and comfortable with.