One of the great things about having a job is that you get the satisfaction of socking money away for the future. However, once you’ve established a rainy day fund, you might feel like taking on more risk in search of higher returns by creating a stock portfolio for yourself. Whether you’re a skilled day-trader or have a more long-term perspective, read on for things you should do when you’re managing your investment portfolio yourself.
Set Your Investment Goals
Before you start assembling your stock portfolio, you need to know why you’re investing. Different investment goals require different strategies. For example, if you’re investing for retirement when you’re young, you have a much longer time horizon. This lets you take more risk than if you were investing money for short-term gains, such as for a home down payment in the next year.
Evaluate Your Risk Tolerance
Your risk tolerance represents your capacity to accept the possibility of losses in exchange for the potential for larger returns. If you can’t stomach the idea of losing a large portion of your investment, you’ll want to use less volatile investments in your portfolio management. For example, you might opt for older, more stable companies rather than start-ups, or bonds rather than stocks.
Consider Your Emotional Capacity for Ups and Downs
Though stocks have historically averaged about 10 percent growth per year, according to the Financial Industry Regulatory Authority, it’s not a steady climb. Instead, there are peaks and valleys. No matter how carefully you invest, you’re almost guaranteed to lose money on some of your investments. If you know your emotions may cause you to sell after prices tumble, consider getting additional financial advice by working with a financial advisor who can help you ride out the ups and downs in a more methodical way.
Use Tax-Efficient Accounts
The federal government offers accounts with substantial tax benefits that are designed to help you save for retirement, including IRAs. You can manage stocks and other investments in your IRA yourself and have the money grow tax-free as long as it remains in the account. You might also have access to a 401k through your employer. Though you might not have the same level of control as you would in an IRA (unless your company offers a self-directed option), a matching contribution from your employer could make this lack of control worth it.
Put in the Research
If you’re picking individual stocks, you can research mandatory government filings, such as 10-K and 8-K forms, which give you important information about the company’s finances and operation. For mutual funds, study a fund’s prospectus and shareholder report. If you don’t have the time, or would rather put your time into other money-making opportunities, consider using a financial planner to do your research instead of doing it yourself.
Compare Trading Fees
Before deciding where you’re going to build your portfolio and do your stock trading, compare fees across accounts to see which one suits you best. You can see which brokerages have reduced fees to less than $5 per trade, such as Charles Schwab and Ally Financial. Meanwhile, the Robinhood app allows free trades on U.S. and over-the-counter securities.
Invest in a Range of Companies
If you invest all of your money in only a few companies, you might hit a grand slam and make a large profit. However, if one of those companies does poorly — especially due to something completely unforeseen — your portfolio could take a substantial hit. To lower your risk, invest in a wider range of companies and have a portion of your money in other asset classes besides stocks, such as bonds or real estate.
Diversify Among Company Types
Simply having a dozen different companies in your investment portfolio doesn’t guarantee that you’re lowering your risk. For example, if you just own all social media tech stocks, and that sector performs poorly, you still feel the loss. Instead, look to invest in companies that have different characteristics among the following categories:
Size: Companies are typically classified into small-cap (under $2 billion in market capitalization), mid-cap ($2 billion to $10 billion) and large-cap (larger than $10 billion)
Type: This typically breaks down into growth stocks vs. value stocks
Geographic Area: Include both U.S. and international companies in your portfolio
Consider ETFs or Mutual Funds
If you don’t have enough money to invest in a widely diversified portfolio of individual stocks and bonds, consider mutual funds or exchange-traded funds. Both types of investments represent a bundle of underlying investments that might provide more diversification than you could buy on your own.
Related: How to Open a Brokerage Account
Rebalance Your Portfolio
Over time, different classes of assets will outperform others, so your portfolio can look very different than you originally intended it to look. For example, if technology stocks have a great year and double in value, while healthcare stocks plummet, you could find yourself vastly overweighted in tech stocks. To avoid being over-exposed, rebalance your portfolio periodically by taking money from the sectors you’re overweight in and reallocating it to sectors you’re underweight in.
Use Apps to Monitor Your Investments
Using apps to track your investments can make updating your portfolio as easy as pulling out your phone. For example, Personal Financial Capital is a free app that lets you access your investment data so you can see how your net worth is changing in real time. Ticker, another free app, lets you set alerts when stocks you’re watching trade above or below a certain level, keeping you in the know.
Don’t Check Your Portfolio Daily
Even if you know you’re investing for the long term, it can be easy to get caught up in checking your portfolio every day, or more often, to see how you’re doing. However, remember that “long-term” really means years or even decades. Avoiding frantically checking your phone for the most recent price changes can help you avoid making hasty, emotionally driven decisions you’ll later regret.
Manage Debt Wisely
Don’t shoot yourself in the financial foot by investing when you have high-interest debt outstanding. Think of the interest rate on your debt as the minimum return you have to earn to make it worth investing rather than paying off what you owe. For example, if you have credit card debt accruing interest at 25 percent, it’s hard to justify building a stock portfolio instead of paying down debt because the chances that you earn a 25 percent return investing are slim. But, if you only have a mortgage loan at 3 percent, you can feel better about investing because as long as you make more than 3 percent, you come out ahead.
Track Your Cost Basis
When you sell your investments, the IRS requires you to report the income (or loss) on your income tax return. However, you don’t pay tax on the entire proceeds — just the amount of the proceeds in excess of your basis, or what you paid for the stock, including trading fees. For example, if you buy a stock for $150 and pay a $5 fee, your basis is $155. If you sell it later for $175 and pay another $5 fee, your net proceeds are $170, giving you a capital gain of $15.
Pay Attention to How Long You’ve Owned Your Shares
Not all capital gains are treated the same for tax purposes. For shares that you sell after owning them for one year or less, you pay taxes on the gains at your ordinary income tax rates, which can go as high as 39.6 percent. However, if you hold a stock for more than a year before selling it, the gain is taxed at the lower capital gains rates — 20 percent or less — which can be a big tax saving.
Having a Stock Portfolio Isn’t a Financial Plan
Putting together a stock portfolio is a great step toward financial security, but just having one doesn’t mean you have a comprehensive financial plan. You should look at a range of other areas of your financial life, including creating a budget, buying life and health insurance and planning for income taxes. If you’re unable to put the time into managing these areas, consider using a financial advisor to help keep you on the right track.
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