Building Your $100,000 Portfolio

Building a successful investment portfolio is an exciting challenge. New investors also face an often-confusing array of risks, opportunities, timing issues, management necessities, and uncertainties.

The tools discussed in this lesson will help you gain confidence, make better decisions, and achieve success with assurance. If you’d like to eliminate the risk of using your real funds at first, play the popular stock simulation game at WallStreetSurvivor.com. All components are real and accurate. Though, instead of real money lost and gained, all funds are virtual.

Go forth and trade with confidence!

Risk and Diversification

Risk and diversification are two key factors in all investment environments. You must learn more than the textbook definitions of these factors. You need to understand how they can affect your portfolio. Even risk, when properly managed and understood, can often help your portfolio. There are different levels of risk and types of diversification.

A primary investment goal is risk minimization. Diversification is the most reliable method of minimizing investment risk. Here are some ways to accomplish diversification.

• Across industries: Investing in different industries spreads around the risk that any one industry could suffer a serious down market. For example, totally investing in oil, real estate, or auto manufacturers may generate wonderful returns. However, a problem in any one industry can wreak havoc with your entire portfolio.
• Across market caps: Market cap (short for capitalization) is another way to identify and classify the size of companies. Typically classified as large cap, mid cap, and small cap, companies can also fit newer classifications, like mega cap, micro cap, and even nano cap. You can classify companies along these lines or with a different method of your creation.
• The key for you, as a newer investor, is to consider investing across different sized market caps to mitigate risk and increase the diversity of your portfolio.
• Across dividend yields: Companies often differ widely in their approach to paying dividends. Some Boards of Directors favor distributing earnings strongly in the form of dividend payments, while others want to conserve cash to fund R&D (research and development) and/or growth. By investing in some securities with a track record of high dividend yields and also those that display cash conservation to fund new products or expansion, an individual gains some risk protection.
• International and emerging markets: The globalization of the investment world has made emerging markets excellent sources of diversification. Emerging markets are those countries that are restructuring their national economies and strategies to reflect a market-oriented philosophy. They typically seek direct investment at all levels of funding, including from the smaller investor. If you do your homework, you may find some wonderful opportunities to increase your portfolio and manage the risk factor, while enjoying good earnings and appreciation.
• Precious metals and commodity ETFs: Many people believe investing directly in precious metals (gold, silver, etc.) or through commodity ETFs (exchange traded funds), which are tied to precious metal indices, because these investments are valuable as diversification and risk mitigation tools. Once again, you should become familiar and comfortable with the historic movement of precious metals AND the global economic conditions that preceded or existed during these price movements. In addition, precious metals have "inherent" value along with market pricing.
• Dollar Cost Averaging (buying and selling): Designed to reduce risk, dollar cost averaging strategies dictate that you buy smaller blocks of the same securities (versus large lump sum purchases) over time to reach the investment position you want. This often “smoothes out” the cost factor of these securities to help you manage the vagaries of market price changes – both up and down. When you’re wearing your “selling hat,” you can use dollar cost averaging the same way. By spreading out your sales of a group of securities, you often “even out” the market price changes with dollar cost averaging to generate a more risk-free and stable return.
• Sharpe Ratio (Index): Nobel prize winner, William Sharpe, created this formula over 40 years ago. A very popular statistic, the Sharpe Ratio informs you whether the higher returns you receive from certain securities are the product of your wonderful investing strategy or higher risk and volatility. This helps you select the right stocks for you and your plan.

Learning Which Securities Match Your Goals and Knowledge

With so many investment choices, what does the new investor buy? If you wish to become an information and strategy expert, you could spend hours reading thousands of statistics and expert opinions. However, you’d need to dedicate so much time your “headache quotient” would go off the charts.

Often, a basic “KIS” approach (keep it simple) can work for you better than any number of sophisticated, complex strategies. Investing in “what” you know based on “how much” you know can provide a good return and a higher level of comfort.

As an example, the legendary investor Warren Buffet has amassed his fortune without using a wide variety of exotic strategies. He is a classic “buy-and-hold” investor. He purchases securities the “old fashioned way.” Buffet studies companies and determines their core values based on the products they make and/or sell, profitability, management quality, and their future growth and sustainability projections. He never acts on rumors or pure market price indicators. Incredibly, although recognized as one of the preeminent investment gurus on our planet, Buffet seldom sells items in his portfolio. He prefers to use his income stream to enlarge his portfolio.

Peter Lynch, another globally respected investment genius, also embodies a solid – not exotic – investing strategy. After graduating from Boston College (1965), Lynch was hired as an intern at the company that came to be forever linked with his name, Fidelity Investments. This was mostly because he caddied for Fidelity’s president at a local country club. So began his meteoric financial career.

Among his many accolades, Lynch is noted for an important and simple theory: Invest in what you know. This is an excellent starting – and possibly enduring – strategy for newer investors. Instead of spending valuable time becoming an expert on complex investing strategies, expand your “local knowledge” and use your personal industry expertise to purchase securities of companies and industries you know.

Think about stating your goal as building a portfolio of “non-losers” as opposed to a group of “winners.” A strategy of finding “non-losers” combined with investing in companies and securities you know often leads to locating under-valued stocks and true bargains that maximize your investment dollars.

You may also find one or more “ten-baggers,” a world-famous Lynch-ism. In baseball, “bags” are a popular term for the “bases.” Finding a ten-bagger (hitting two home runs and a double) means you’ve found a stock that returns ten times your original purchase price. Even finding a group of two- or four-baggers should make your portfolio and bank account quite happy.

Stock Screeners

Stock screeners can save you time by finding stocks in which you may have interest. Spending a little time on the Internet will introduce you to many different types of stock screeners. Although there are software-specific differences, all stock screeners work just about the same.

You decide on a mix of financial and investment preferences and parameters. You can then input this data and allow the stock screening software to locate securities that “fit” your perceived descriptions. With some freely available and others offered on a subscription basis, stock screeners are easy and convenient helpers.

While stock screeners operate with the same goal – finding stocks that match your wishes – you can choose different formats for results. Some will generate results on expected returns, risks, and projected yields, while others can offer stock suggestions based on growth, effective strategies, and other parameters.

Popular Analysts and Websites

There is an astounding volume of information available from a myriad of “experts” and a plethora of websites. Most are useful to people, but you’ll decide which sources are most useful to YOU. Here is some information on a few popular sources.

• MSN Money: Offering you stock quotes, financial news, rumors, strategies, and blogs, MSN Money can serve as a supermarket of investing data for the newer or experienced investor. Microsoft has expanded and better focused this source over the years. It now offers a potpourri of investment and financial information for all investors. Yahoo and AOL have similar investing websites for your knowledge base.
• The Motley Fool: Fool.com is an always-interesting mix of financial news, investment strategies, and large doses of humor. Don’t be “fooled” by the strong injection of humor, the Motley Fool offers hard hitting, serious news and opinion. Tom and Dave Gardner and their talented staff have been delivering their unique and informed message since 1993 and the Fool is now a full-service financial media enterprise. If you'd like your investing information tinged with some pleasant sarcasm and edgy humor, the Fool might be perfect.
• Cramer: Jim Cramer, host of CNBC’s Mad Money and co-founder of TheStreet.com, is a journalist, lawyer, and “infotainer” (his term). He has been dispensing financial and investment information to anyone listening since the mid-1990s. If you need a break from reading financial statements or waiting for your stock screener to advise you of your next hot investment, Cramer might add some zest into your existence. Also a former hedge fund manager, Cramer has been in the investment trenches for some time. You may not agree with all that he says, but you will be informed and entertained.
• Other Sources: There is a wealth of additional information available to reinforce your investing career. Get on your Internet surfboard and visit some of the many websites devoted to investment news and strategy. If you’ve traded in your rabbit-ears antenna for a cable, fiber optic, or satellite connection, you’ll find more information and strong opinions on many TV shows dedicated to finance and investing.

Summary

It’s time to decide on how you’d like to construct your portfolio. The best starting solution might be to take advantage of the wonderful and very realistic fantasy stock and portfolio simulation game offered by WallStreetSurvivor.com. You’ll enjoy all the action and adventure with the game as you will when you decide to put your real money on the table.

Whether you decide to invest virtual money or real funds, you should now have a basis to create your own thoughtful plan and strategy. Using your virtual portfolio and trading ability at WallStreetSurvivor.com, you can test your strategy and “tweak” it, if necessary, to achieve profitable results in both the virtual and real world.

Happy trading!