Stock Market Guide: Building a Profitable Stock Portfolio

The way you group your stocks, commodities, bonds and ETFs form your portfolio and a strategically picked portfolio is one of the best ways to success in the stock market.

Defining your goals and the risk you are willing to take will have a great influence on the results. That’s why it’s important to make a good asset allocation, as stock prices are subjected to unexpected oscillations.

To help you achieve the best results, we have organized the basic focal points that experienced investors consider when it comes to building a profitable portfolio.

How can you protect your stock portfolio from instabilities?

Declines on prices may happen from financial, political or any other structural changes. In general, a consistent and long term growth of investments may be achieved through diversification.

Technically, diversification is the strategy that allows reducing risks by allocating investments to several classes of assets and sectors. The composition of a portfolio is determined by several factors, such as strategy, expected return and investment period.

For example, if you are retired and need annual returns, then you should build a portfolio for the long term, based on companies that pay dividends and present less operational risks. But if investments won’t represent your primary income source, you could accept higher risks in order to seek higher returns by dealing with opportunities and the fluctuations of the market.

Identifying Your Investor Profile

After defining if you need a short term or a long term return, your risk tolerance will set the tone of your investments. How you respond to a loss will also help define the asset’s allocation that makes you more comfortable.

Conservative Investors:

Have low risk tolerance. Consequently, their portfolio should be based on safer choices as high-quality equities and bonds. They should look for less volatile stocks, those from solid companies that offer stability and liquidity.

This portfolio would be built mainly on fixed income securities, and only around 30% should be invested on equities, cash or equivalents.

Moderately Aggressive Investors:

Show a higher risk tolerance to achieve a balance of capital growth and income. In this case the portfolio should include companies that work with essential sectors like energy, food and health, because they offer long term stability. A portfolio composed of 50% fixed income securities would be a good call for this kind of investor.

Aggressive Investors:

Could choose companies that offer more return potential, diversifying their investments with small businesses, domestic and foreign stocks and less consolidate businesses.

Safety, liquidity and returns are hard to be found together in the investments available on the market. So, allocate your assets according to your investor profile, dividing your money among stocks, bonds and short-term reserves may be the recipe for success.

Now it’s time to rest and wait for the results, right?

Wrong! Sometimes it’ll be necessary to change your asset allocation and/or rebalance your portfolio. The most common reason for changing your asset allocation is a change in your time horizon. For example, as you get closer to your investment goal, you’ll probably need to change your asset allocation to a more conservative mix of investments.

Other factor may be a change in your risk tolerance, financial situation or in your main financial goal. What happens is that some of the investments you chose some time ago may not be aligned with goals anymore. Or you realize that some of them are growing faster than others, some are over emphasized, or you simply don’t feel comfortable with their level of risks.

If you come to the conclusion that it’s time to sell some of your stocks, or if your growth stocks have appreciated strongly, you may incur significant capital gains taxes. So, be careful when rebalancing. Many investors just remember this when it’s already too late.