If you want to create wealth over the long term, investing in the stock market is one of the best ways. However, it’s often easier said than done. You’d have to indulge in a bit of portfolio management to build your stock portfolio and gain wealth from it successfully. You can reduce the overall investment risk by successfully creating the right stock portfolio. For those of you who wonder how to create a stock portfolio that generates consistent returns, you should consider the following factors.
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Know Your Goal
Before anything, make sure to know your goal as to why you would like to invest in stocks. Your goal for these investments can vary from preparing a retirement fund or an education fund for your kids.
As you know, the stock market offers substantial returns. Know your goals first if you want to have some growth component in your portfolio. According to your goal, you can then choose which types of companies you should add to your portfolio and in what proportion.
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Asset allocation
After knowing what your goals are, you need to allocate assets accordingly. This is an essential step because asset allocation gives you the potential to get higher returns while lowering the risk by dividing your hard-earned investment into various asset classes.
You must also assess your risk profile and tolerance to allocate your assets successfully. This step allows you to make more informed decisions. For instance, if you’re planning for your retirement 20 years from now, you can allocate your assets with a ratio of 80:20 split between growth stocks and dividend stocks.
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Diversify
Academically and mathematically, an investor can obtain adequate diversification by holding as few as 40 stocks. Therefore, you have to diversify your stock portfolio, with holdings across numerous sectors and geographies.
However, diversification doesn’t mean you should own as many investments as you can get. That’s because diversity focuses more on making investments that offer different roles in a portfolio. Some factors like asset level, time horizon, and risk tolerance will determine the number of stocks that are right for your portfolio.
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Have an Exit Strategy
An exit strategy means having a planned approach to terminating a situation in a way that will either minimize damage or maximize the benefit of your investment. An exit strategy is vital to successful investing, even when you haven’t built your stock portfolio yet.
You should know when and why to sell a stock to help you avoid getting emotionally attached to a stock or panic selling. Consider selling the stocks you own when the company misses its earnings estimate or the stock reaches its target price. So, before you make any stock purchase, invest some time into your exit triggers since it’s easier to know what to buy than when to sell.
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Keep Taxes in Mind
While investing is a terrific method to have financial security, it’s also a great way to build wealth if you don’t keep taxes in mind. There are some taxes on investment, such as a tax on capital gains, tax on dividends, and tax on mutual funds.
It’s essential to consider the tax status of the account that holds the stock portfolio. When trades are implemented, the tax status will have tax implications. Don’t let taxes be a pain to you by avoiding only holding the stock for one year or less. That’s because you’ll qualify for lower long-term capital gains rates after the one-year mark.
With enough time and research, anyone can build a stock portfolio. However, stock portfolios are not suitable for everyone. Now that you know how to build a stock portfolio, go ahead and try it yourself. But before you do, ensure you have a trading and Demat account. Check out our other articles to read more about this topic!