What Makes a Good Stock Portfolio?

Many investors consult financial advisers to build and manage their stock portfolios.

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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 Construction

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. 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.

Portfolio Management

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.

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.

Company 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.

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About the Author

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.

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