A good stock portfolio in general is broadly diversified and able to withstand market losses. However, depending on objectives and time horizon, what constitutes a good stock portfolio for one investor might not be so good for another investor. Although general rules of thumb do apply, there is no one-size-fits-all approach to portfolio management and construction.
Portfolio diversification, meaning picking a range of assets to minimize your risks while maximizing your potential returns, is a good rule of thumb. A good investment portfolio generally includes a range of blue chip and potential growth stocks, as well as other investments like bonds, index funds and bank accounts.
Constructing Your Portfolio
Portfolio construction is about selecting stocks that are most likely to meet your investment objectives. If you are nearing retirement and are seeking income, strong dividend-paying stocks might be suitable. These are usually so-called blue chip stocks that are unlikely to fluctuate widely in value and woo investors by paying a steady and predictable portion of profits back to shareholders.
However, if you're early in your career and it'll be a long time until you need to draw on your investments, it might be more appropriate to allocate your portfolio toward slightly riskier stocks that have more potential to grow over time. Technology stocks capitalizing on new markets and inventions are a classic example, but they're not the only types of growth stocks in the marketplace. Research using brokerage sites, the financial press and company literature to find businesses that you feel are set to take off.
Consider whether you want to directly invest in stocks or invest through funds or take a mixed approach. Mutual funds generally employ human experts to pick stocks in particular categories, such as energy stocks or newer companies, while index funds often automatically pick stocks based on published indexes like the Dow Jones Industrial Average, the S&P 500 or industry-specific indexes. Index funds can help you track the market or a market sector as a whole and charge lower fees than other funds.
Also make sure to think outside the stock market box: There's no reason not to consider other investment categories, such as bonds (which represent loans to companies or government agencies), real estate or bank products such as certificates of deposit.
Managing Your Portfolio
Because economic factors, company prospects, financial performance, and investment objectives are all subject to change, a good stock portfolio must change with them. This means adjustments as needed to respond to external developments and maintain a balanced portfolio.
For example, the value of some stock holdings might rise significantly over time. That's good, but it can result in those stocks making up a disproportionately large share of the portfolio, reducing diversification. Conversely, if a strong company has a temporary setback, that might mean an opportunity to add shares at a lower price.
Understanding Industry Diversification
Because of the nature of the market, no stock or industry will always perform well. However, it's unlikely that industries such as retail, technology, health care, financial services, energy, and entertainment will all perform poorly at the same time.
A portfolio that includes this type of broad diversification is key in avoiding severe declines in total value. Diversification can let an investor remain in losing positions and await a rebound instead of being forced to exit those stock positions prematurely.
Exploring Portfolio Diversification
Beyond investing across various industries, a good stock portfolio holds multiple company names within each of those industries. One company is rarely representative of an entire industry, and there always are company-specific risks such as accounting problems, litigation or fraud.
To avoid overconcentration on a single stock, robust portfolios generally hold several small, medium, and large industry leaders to minimize risk and manage investment volatility.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.