Investing in stocks is one of the best ways to grow your wealth but it’s not something that can be done in a single night and having one or a few stocks aren’t enough so building a stock portfolio that contains a wide array of different stocks from different industries will give you the best chance of achieving your financial goals over the long term. The time it takes depends on how much you invest consistently. You may have a 30-year plan but also it’s plausible to have a 5-10 year plan if you invest large enough amounts of cash over the shorter period.
To build a stock portfolio there are many steps you should take so that you can build a portfolio of stock assets that can eventually create an income stream for you whether you decide to receive an income from dividends or an income from selling some of your assets in the future to pay your bills. These 10 steps are:
- Choosing the best investment platform and the right investment account
- Setting goals
- Calculate how much you should invest
- Allocation percentage your investment funds
- Decide your investment strategy
- How you can pick stocks
- Decide if investing in ETF’s will boost your portfolio
- Diversify your assests
- Rebalance your portfolio
- Be aware of the risks
In this post, we’ll look into the 10 steps you need to take to build a good stock portfolio that you can eventually rely on to earn an income and more importantly, retire in a good financial position.
What is a stock portfolio?
A stock portfolio is a collection of assets in the form of stocks that you own. When you own a stock, you essentially own a piece of the company that you have invested in and the more you own leads to a portfolio of companies that you own. Together these stocks form your stock portfolio.
This is different to an investment portfolio which although has similar traits, a stock portfolio only consists of stocks and funds whereas an investment portfolio can also include other assets such as real estate and cryptocurrency.
Diversification is very important so it is better to have an investment portfolio over just having stocks but when beginning your investment journey it is a good idea to focus on just one area and then slowly build your stock portfolio into an investment portfolio. For example, I first started investing a few years ago only buying stocks and funds but then when I felt ready, I bought a house and continue to invest in real estate through other methods. Then I bought into cryptos.
Why you should invest in stocks?
Investing in stocks is one of the best and safest ways to grow your wealth. While it’s true that any form of investment has the risk of losing your money, over the long term the stock market has proven to recover and rise above previous figures even after a stock market crash. Your stocks won’t make you rich in a short period of time since investing is a long term game but after some time, you’ll notice that your initial investment has earned more interest than the amount you initially invested. This is through the power of compound interest.
Compound interest was described by Albert Einstein as the 8th wonder of the world and investors love compound interest because it’s money on top of money. For example, if I was to invest £500 every month into the S&P500 for 20 years, the total amount I will have invested is £120,000. However, my end balance will be more than that due to compound interest. At a conservative 8% return, I will have earned £164,500 in interest making my total balance £284,500.
I’ve written about compound interest in more detail in this post which explains how it works and what to watch out for so that it doesn’t work against you. Albert Einstein also said that the person who understands compound interest earns it while the person who doesn’t, pays it.
Inflation is one of the enemies of money and time. For example, £1 million is still a lot of money but it’s not worth as much today as it was worth 30 years ago. That is because due to inflation it’s a lot more expensive to buy things. An example of this can be seen in the area that I live as in 1995 a house was bought for an average price of £40,000 but today the average price for a 2 bedroom house is £247,000.
Investing in the stock market enables your money to grow so that when inflation hits your wealth would have grown as well which allows you to keep pace with rising costs. The solution is to buy stocks that protect your portfolio so that your overall profits aren’t damaged by rising inflation.
Prepare for your retirement
A pension fund might not be enough for your retirement especially if you want to retire early. The FIRE movement is quite big now, and investing in the stock market is one of the quickest ways to ensure that you have enough to live off when you finally decide to retire.
Building a stock portfolio will give you a mother stream of income which will help you reach your financial goals and help you retire in a stable position so you can enjoy the rest of your life.
When should I start investing? Is there a best time?
The best time to start investing is as soon as you’re legally allowed to do so. In most parts of the world, you can legally trade stocks at 18 years old but there are ways you can start at 16. But if that’s not the case then the next best time to start investing in stocks is today.
The more time you spend investing, the more profits you’re likely to make this growing your wealth and overall net worth. My recommendation would be to not delay and start today.
Complimentary Reading: When Is The Best Time To Buy Stocks
How to build a stock portfolio
The following are 10 steps that you can take to ensure that you build a good stock portfolio to grow your wealth and be able to rely on it for a steady income after at least 25 years or less if you decide to invest more. If possible you should try to invest as much as possible in the early years as this will create that snowball effect to build bigger returns in the form of interest. But be careful not to fall into debt. Pay your bills first.
Here are the steps:
Choose the best platform and the correct investment account
Choosing the best platform for your investment journey is really important to ensure that you’re able to invest freely into the stocks that you want to buy at the lowest possible cost to yourself so that you’re able to create a good stock portfolio. I generally recommend Trading212 (referral link) as the user interface is easy to use for beginners and it has the lowest fees of all the platforms available. However, other platforms may offer other features e.g. eToro has a great copy trading feature that allows you to copy the investments made by other investors so you don’t have to do anything.
Also choosing the right account is very important for your long term growth. When I started investing I chose the wrong account which led to losses when transferring over – but luckily I realized early on. If you’re sure you will invest more than 20,000 in any tax year then an Invest account will be right for you since an ISA account limits you to £20,000 a year (If you live in the UK). I the US I believe it’s much lower.
The benefit of investing into an investment ISA is that your earnings from your investments are tax-free and when you decide to sell your shares, then you’ll only pay capital gains tax once you move those funds outside the ISA account. Not while those funds are still available within the ISA.
Set your goal – this will help you decide which stocks to invest in
Having a goal is very important because it gives you something to aim for. It could be several different things and not just how much money you would like to have gained after a set number of years. Some ideas for goal setting can include what type of stocks you would like to purchase, how much you will invest each month, any type of stocks that you will avoid e.g. penny stocks, etc.
The goals that you set can act as a rule guide for how you will invest. You might want to read my post (linked here) on how I decided on my investment strategy. It contains some rules that I follow when investing to help me keep track of the final destination that I want to reach when I retire.
Set a certain amount you want to invest every month – determined by your goal
Deciding how much you should invest is very useful because it’s absolutely imperative that you don’t fall into financial trouble while investing. That’s why I recommend that all bills sound be paid first and a set amount should be put into your emergency fund which will stop you from selling your assets (stocks) if you ever need money.
Find out how much you can afford to invest and even if it’s a small amount, that’s fine. Remember that investing nothing is less than investing little.
Recommended Reading: The Best Way To Invest With A Small Amount Of Money
Allocate percentage to each industry
You’ll definitely have a favourite industry. Since my background is in software engineering, I favour tech stocks. But at the same time, I don’t invest all of my money into tech stocks since over-relying on one industry is one of the most common ways to lose money quickly.
I like to follow the S&P500 method of allocating my money into my investments. I usually choose 3 industries which. I know well to allocate a larger portion of my investments and then equally distribute the rest into the other industries.
Decide your investment strategy – DCA or lump sum
It’s important to have an investment strategy or a plan when you start investing because this will help you remain a consistent investor as well as help you to build and grow your wealth over the long term. There are many investment strategies that you can choose from but the main ones are; Dollar-cost averaging and lump-sum investing.
This is when you decide to invest the same amount into stock at the same time every week or month for a set period of time e.g. 25 years thus buying stocks no matter what the price is. This helps reduce your risk and also ensures that you never pay the highest price for a share in a company.
This is when you decide to invest a larger amount into stocks while the stock is in your opinion at the best price. This could be advantageous as if you have timed the market correctly, you may have bought a large number of shares for the lowest possible price.
Complimentary Reading: What Is The Best Investing Strategy?
Most of the time the stocks you pick will be dictated by the goals that you have set (above). This is a great way to pick stocks as it helps you remain loyal to your investment plan and disciplined enough not to fall victim to common investing mistakes like the shiny ball syndrome – which is when a new stock that isn’t part of your plan seems really enticing that you purchase it only because it looks good form the outside.
But when it comes to picking stocks I have some rules I follow. The first one is to list companies that I know and regularly buy e.g. I like drinking Coca-Cola so I buy shares in Coca-Cola. Then I like to check the company financials and if they pay a dividend. You can read more about how to pick the best stocks for you in this post.
Decide which funds will be good for you
As. a beginner, investing in an ETF may be the best way to get started because they are essentially already diversified portfolios created by professional investment managers. Each ETF or index fund has been created for its own purpose so you can choose one that matches the goals of your stock portfolio.
I like investing in the S&P500 as well as the FTSE 100 and 250 alongside the stocks that I purchase.
Recommended Reading: Best ETF To Invest In 2021 And Beyond
Diversification of your stock portfolio is very important because it allows you to stay in the green across your entire portfolio. This is done by buying an equal amount of stocks within many different industries e.g. technology, health, finance, consumer goods, industrial, etc.
The reason for diversification is to protect you when something like a stock market correction or a crash happens. Spreading your investments into many different sectors reduces your risk and thus saves you from losing money. But beware of over-diversification – sometimes called ‘diworsification‘.
What is diworsification? This is when you spread your investments over too many industries that your stock portfolio is too thin which reduces the number of profits that you can make. You’re more likely to be successful if you concentrate your investments into a small range of stocks rather than many.
How many Stocks should I have?
A good amount of stocks is somewhere between 20-30 but having said this, Warren Buffet has also said that diversification is a protection against ignorance. This means that those who don’t know what they’re doing diversify while those who do, don’t diversify. Not everyone is Warren Buffet or Charlie Munger so I would recommend diversification.
You might like reading this post in which I write about how many stocks you should have in your portfolio. I further elaborate on what Warren Buffet means when he says diversification is for the ignorant and why he only has ONE stock in his personal portfolio.
Complimentary Reading: 5 Ways to Diversify Your Investment Portfolio
Rebalancing your stock portfolio is very important for two main reasons;
(1) to equally balance your portfolio so that you’re not investing too heaving into one or a few industries more than you are into others. Done this causes you to rely too much on those industries which are bad for your portfolio because if the prices of those stocks dip, then the majority of your portfolio will be affected causing you to lose money.
(2) to recoup or cut down on your losses. Some investors follow the path of selling the stocks that are in profit while buying more of the stocks that are in loss. That seems strange but it’s usually done so that the average price per share of those stocks can be lowered to eventually allow for a profit before selling those too.
My strategy is not to sell anything. I usually buy more stocks whether they are in loss or profit while trying to maintain an equal allocation of my money towards each investment. For example, if Apple is in profit but Microsoft is in loss, I will allocate 30% of my funds to Apple but 70% to Microsoft. Then change the percentage as and when I need to.
Understand the risks
Building a stock portfolio has some risks however the most common one is that you might lose money on some of your investments. That’s because the stock market can either go up or down and this can be a result of many factors:
A stock market correction usually happens when the stock market is at its peak or it is over-inflated and consists of stock prices dropping by anything between 10-20%. Although this might seem like a bad thing, it’s actually very good for the stock market as it prevents prices from being very inflated. When a correction happens, you may likely lose money from some of your investments.
The stock market has crashed many times over the last 50 years. When this happens prices of stocks fall below fair value levels. This can be due to many reasons but one of the last crashes we’ve experienced was when Covid-19 stopped every market causing. a lot of industries to close for long periods.
Do you need a financial advisor?
If you need help making decisions, then a financial advisor will be very beneficial. Managing an investment portfolio takes time and skill that has been gained over years of practice. But you don’t always need one as you can start investing small amounts by yourself until you get the hang of it.
I believe that every skill can be learned including investing. The top attributes you need are consistency and patience.
What is a Robo advisor?
A Robo advisor is a platform that will collect information about you to determine things like your investment goals in conjunction with your earnings and spending habits to help provide you with a plan for investment.
They can be very useful for beginners or those who don’t have the time or passion to research every stock or fund. They come at a cost and usually charge a fee for making investments on your behalf.
What is solo investing?
This is a new term used to describe the newer generation of investors who invest by themselves using a trading platform such as Trading212, FreeTrade, eToro, etc. It is self managed by the investor and not by anyone else.
Most new investors will fall int this category of investors.
One of the mistakes that some investors make is that they try to time the market while timing the market is almost impossible because you need to be right on more than one occasion. You need to be right with regards to when the stock prices are at their lowest so that you can buy and then you need to be right again for when the stock prices are at their highest so that you can sell for the most profit. Unfortunately, this is impossible. You might get lucky and be right one of the two times but probably not both times.
That’s why investing consistently and regularly is the best way to build a great stock portfolio because it will give you the best chance to buy stocks. And if you use the dollar-cost averaging method then you won’t ever pay the highest price.
Investing in the stock market is a long-term game, so unless you’re already a millionaire, you’re not going to get rich quickly. The sooner you accept this the easier it will be for you to keep investing for the long run which could be for the next 30 years. If you’re able to save more of your money and invest larger amounts regularly then you could grow your portfolio much faster but it might still take 5-10 years.
Patience is a virtue and the most successful investors were the most patient ones. Warren Buffet started investing when he was 11 years old in 1941 and became a millionaire 20 years later in 1962. He’s now a billionaire in his 80’s.
Stick to your investment strategy
Remaining loyal to your investment strategy is key to becoming a successful investor. One of the mistakes a lot of new investors make is that they see the hype around certain stocks and even if that stock is not part of their strategy they’ll invest in it only to end up losing money. If you’re lucky you’ll make some but investing in the stock market isn’t about luck. It’s about being patient and consistently investing over the long term. To read about the 17 most common mistakes investors make read this post.
Yes, it’s okay to experiment in other types of stocks that may not be part of your investment strategy but it’s important to manage your risk well when doing this.
Building a stock portfolio takes time and commitment. The steps mentioned in this post are the steps that every investor should consider when creating a portfolio however there might be other factors to think about alongside these points. This post is intended to act as a guide to help you get started as well as throw you into the mind of an investor who has set out to build a great stock portfolio.
I’ll leave you with the following two key points:
- You may not agree with all the points or feel that some points may have been missed. That’s okay. There isn’t one investor in the world who agrees with the other on everything and everyone has their own path – even Warren Buffet and Charlie Munger have some differences!
- Just start. It’s the best way to build wealth.
Hopefully, you liked what I had to share. If so, pay it forward by sharing it with others.