Although there are numerous companies that issue stocks, the core of a portfolio should consist of stocks of financially well-positioned companies that have above-average earnings expectations.
A well-balanced portfolio should include 15-20 stocks from at least seven different industries. Stocks can be acquired successively. Since stocks should be viewed as a long-term investment, they should yield a higher return than the 9 percent that can be expected on average based on market history. The likely earnings expectation can be estimated by adding the return from dividends to the projected earnings outlook. A stock expected to have an average earnings growth of eleven percent and a dividend of two percent could have an annual growth of thirteen percent. As a general rule, well-priced stocks with a moderate but above-average growth outlook are the best buy. Statistically, stocks that are expected to have very high growth are usually overpriced and have a harder time meeting investors’ inflated earnings expectations.
There are several methods available for selecting stocks:
- Recommendations from a knowledgeable trusted person are often worth a lot. It is advisable to check the recommendation against information about the company and to make a review for suitability for your own portfolio before you buy shares.
- Choose a company with which you have a special affinity and whose business model is plausible to you. An old stock market adage says: Only invest in what you understand. If you have special expertise in an industry, it is easier for you to recognize the company’s direction and anticipate future developments. This gives you an edge over most other shareholders who, due to a lack of know-how, can only rely on external assessments. If you make a preference, you should prefer an entire industry and not a single company.
- By comparing and analyzing several companies of an industry, the most promising candidates can be better identified. Exotic and highly speculative stocks should be avoided. These securities, which are often treated as insider tips by some stock market gurus, should only be examined and considered once a certain amount of experience has been accumulated.