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How to Choose the Best Stocks for Your Portfolio

Investing in stocks is a great way to build long-term wealth, but it’s also easy to make mistakes that can derail your investment strategy. Sometimes these mistakes are minor, while others can lead to significant consequences. Understanding how to pick a stock to invest in isn’t always a simple decision, as it’s a good idea to do enough research in advance for a diversified stock portfolio. A single stock by itself will help, but that alone is not enough. Imagine a football team trying to win the game with only a quarterback on the field. You need lineman to protect the quarterback, receivers to move down the field. Even more importantly you need coaches and coordinators to call plays based on what they are seeing on the field, much like the market. Keeping a few things in mind can help you with portfolio allocation while setting yourself up for future success.

Invest in Successful Companies

One of the keys to investing in stocks is to look for companies that dominate their industries. For example, many of the same companies show up in different portfolios, whether mutual funds, index funds, or even individual portfolios. Companies such as Amazon, Meta Platforms Inc, Alphabet Inc., and Apple often appear in numerous portfolios due to their success in dominating their specific industry. These businesses have a strong track record of turning consistent profits while also providing innovative products and services. Adding some of these companies to your stock portfolio is often an excellent choice due to their history of success.

Asset Allocation

Balancing risk versus reward is critical to a diversified stock portfolio. Asset allocation focuses on dividing your investment into numerous assets, whether bonds, stocks, or cash. Each person’s asset allocation is different, as it depends on how long you plan to invest and your risk tolerance. For example, it’s often recommended to take more risks if you have many years left to invest in the stock market. On the other hand, it’s better to be more conservative with your asset allocation if you are approaching retirement. Reaching out to a financial advisor is beneficial in giving you professional guidance on creating a diversified stock portfolio that best matches your needs.

Stock Portfolio Example

Sometimes investors mistake focusing too much on two or three sectors. For example, someone working in the IT industry may overload their stock portfolio with tech companies. However, the
better option is to create a diversified stock portfolio to help you better manage the unpredictable nature of the stock market. An example of a well-balanced stock portfolio may include investing
in six or seven industries with ten different stocks. Focusing on a diversified stock portfolio will give you an added layer of protection, as it’s possible for a specific sector to suffer losses while the rest of the market flourishes.

Look for Companies with a Solid Track Record

Investing in companies with a solid track record is often a more wise decision than newer businesses. An established company that’s been around for many years is more likely to stay in business. Researching companies with profits that continue to grow over the last eight to ten years can help you better understand how to pick a stock that will continue to be successful. A steady growth pattern is also an excellent sign for investing in stocks. On the other hand, putting a significant amount of your resources into an upstart company is a much more considerable financial risk.

Dividends Still Matter

Dividends offer an immediate return on investment, making them an attractive option to income investors. A company that consistently pays dividends to its investors is a well-run business, as it’s a good idea to check out which companies offer dividends. You can even review an annual list of companies that have increased their payouts each year for the last 25 years to understand better how to pick good stocks. Many of these companies are well-known with a proven track record, which is always an essential trait for investing in stocks that will boost your portfolio.

Closing Thoughts

The only guarantee in the stock market is that there isn’t a guarantee of success. The unpredictable nature of investing in stocks can make it a challenge to find the best stocks for your portfolio. Even the most sound strategies can result in losses due to an almost countless
number of reasons. However, implementing these simple strategies can make a difference in helping you learn how to pick a stock to invest in while avoiding others. Investing in successful companies with a proven track record, understanding asset allocation, and knowing your risk tolerance are key steps to reaching your goals. Ultimately, the stock market will continue to rise and fall, as creating a diversified stock portfolio can help you endure these losses while also experiencing the benefits of successfully investing in stocks.

Posted: April 27, 2022

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