Introduction to finding the right stock for your portfolio
Finding the right stocks is a matter of personal taste and goals. There is no such thing as a universally perfect stock. For example, Warren Buffet would never invest in a tech stock, no matter how great the opportunity. It’s just not in his investing manifesto – it doesn’t fit his taste and goals. Meanwhile, the guy in the next cubicle over has been collecting motherboards for years and feels most comfortable investing in tech companies above all else. Oh yeah, and he just made a killing on Apple.
There are literally thousands of stocks to choose from. So even after you determine the type of portfolio you want to create - based on your risk tolerance and time horizon – you still need to figure out the best way to choose it. Don’t worry, it’s not as overwhelming as it sounds; we’ve listed the most common approaches to help you decide which one is right for you.
The Top Down Approach
An investment in knowledge pays the best interest - Benjamin Franklin.
The top down approach to investing is probably one of the most logical ways to invest. The following steps show you how:
- Try to get a feel for what is going on in the world via the news.
- Through that news and your research, figure out which industries are doing well right now, and which ones are failing.
- Finally, look at companies inside the industries that are doing well, and choose one that you like.
Wall Street Survivor makes it easy for you to try this method. All you have to do is find an industry that you are interested in, and go to the stocks by interest page to choose stocks in your desired industry.
When you would use this: Use this approach if you believe that the success of a specific industry will have a similarly positive affect on companies within that industry. This strategy is more suited for long term investors who can bear some risk. This is because under this approach, no matter how well a company is doing, if the industry stops growing, so too will the company.
Try this out by:
- Choosing an industry that you find most interesting – could be technology, finance, green stock, junk food…
- Read this article and learn how to research your stock
- Buy a stock from the industry you researched.
The Bottom Up way
Put your faith in what you most believe in - Phil Collins.
As you can see, the bottom up way to invest looks at investing from the opposite point of view. Industries and sectors aren’t as important as the companies and stocks that are in them.
It involves finding out as much as you can about a company and its present state of affairs, and then just briefly looking at the industry and whats going on around it as a precaution.
The biggest proponent of this strategy is the great Warren Buffett himself.
The benefit to this approach is that all your concentration is on what the company does and how it works, as opposed to constantly worrying about what’s going on outside it. You are banking on the company regardless of what the stock market is doing.
This way, if your research and analysis are good enough, nothing can stop this company from going boldly where no man has gone before.
When you would use this: If you believe in the company and are less concerned with what is going on around it. This strategy is for both long and short term investors. This mentality makes for a riskier investment though since you are failing to take account for external factors affecting the company. It is like believing you’ll live until you’re 90 because you don’t smoke, without taking into account any other factors that may reduce your lifespan (like falling meteors and other random falling objects).
Try this out by:
1. Think about companies that have products that you use everyday – could Apple’s iPods, Starbucks Coffee etc…
2. Use a Google search to research the competitors of the company you chose in step 1. Find out if the industry on a whole is attractive.
3. If the industry is attractive buy the stock, it it isn’t go back to step 1.
Market Index Investing
Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it. - Warren Buffett
If you believe that the market tends to do better than individual stocks over the long term, then investing in the market index is the way to go. However, this strategy requires that you are able to bear the short term fluctuations in the stock market. A market index is basically a collection of a number of stocks from various industries that are meant to represent the entire market universe. You can’t trade the index as such, but you have the next best thing: ETF’s on indexes. Two market indices widely used are the Dow Jones and the S&P 500.
When you would use this: If you are comfortable with taking risks, and are able to commit to a long-term approach.
Try this out by:
- Head over to the ETF center on Wallstreetsurvivor.com to learn a little more about ETFs
- Browse the ETF center to find indicies that you may be interested in
- Buy one of the ETF incidices
Slow and steady wins the race. - Aesop
If your investment strategy suggests a slow and steady growth over a longer period of time, this is the right approach for you. Stable Income is investing in large, relatively safe companies that issue regular dividends (dividends are quarterly payouts from the company to their shareholders).While these stocks are more stable (and less riskier), their returns are lower as well. A good example of this would be Coca Cola (KO) and Johnson & Johnson (JNJ). It doesn’t matter which industry the stock belongs to – only the size and dividend history of the company matter.
When you would use this: Use this strategy if your risk tolerance is low, your time horizon is high and you want regular income from your investments.
Try this out by:
- Head over to the stock screener on Wallstreetsurvivor.com
- Search stocks that have a dividend yield over 2%
- Try it out by adding one of those stocks to your portfolio
The stock market can be intimidating and scary. By taking the time to learn – and then apply – these different strategies, you really will lower the risks. It may seem easier to just give in (jump in blindly) or give up (quit and buy some lotto tickets). Do neither – take the time to try out some of the strategies risk-free at Wall Street Survivor and see for yourself how empowering investing can be..