The best investment plan is a diversified plan that supports your personal financial goals. But what exactly is a diversified portfolio? A diversified index is when you have investments across different types of assets (stocks, bonds, cash, cryptocurrency like Bitcoin, and fixed assets like real estate.)
Investing across various types of assets helps to spread out your investment risk over time and industries. It also gives you the best chance at achieving meaningful returns in the long run. Once you’ve got some basic investment skills and retirement planning underway, think about adding a couple of individual stocks to your portfolio.
What’s your budget and what do you want to achieve?
Stocks don’t have to be your complete investment strategy. But you will want to consider making them a part of how you invest your cash.
A good rule of thumb is that individual stocks should be about 10-15 percent of your investment portfolio or less. That’s because of the high risk involved in owning companies compared to other ways to earn returns, like bonds.
Bonds, in layman’s terms are like loans. You loan funds to an entity by purchasing a bond that comes with a specific time frame and set terms. With real estate investments, you’re able to minimize risk through financing options (like the ones offered by Altrua Financial) and other investors. Or an even safer option is leveraging your whole life insurance. Some policies allow you to borrow against the value of the life insurance policy for expenses like buying a house, unexpected emergencies, or even going back to college. However, when you’re buying shares of corporate stocks, you are a part owner of that company and your investment’s value is totally dependent on the company’s performance.
Get familiar with your favorite brands
Not sure where to start? One of the best ways to get in the stock game is to start researching a company whose products and services you are already familiar with. Maybe there’s a restaurant chain you love, or a brand whose products you can’t stop raving about, or a computer program or app that has blown your mind — these are all good places to start.
Overall, look for companies that you believe have a strong competitive advantage that can potentially be sustained over time. Do your research on what’s happening in the background. Think about factors that you’d care about as an employee — do you think they have strong leadership? What are their recent expansion or improvement plans? What new markets are they exploring? …and what new products or services are they looking to launch soon?
Do your due diligence
Once you identify a few companies or an industry that interests you, start researching like a pro! It may seem a little daunting at first, but there are many blogs, websites, and online courses that you can take to get more familiar.
Be sure not to ignore these 3 things:
- Price Earnings Ratio: The P/E Ratio is a way to see how much investors are paying for each dollar the company earns. It’s calculated by the price per share divided by earnings per share. (Tip: You can also just search for it on investment websites.) The lower this ratio, the “cheaper” a stock is. Generally, a ratio under 15 is considered “cheap” and potentially a good value, but this isn’t the company’s whole story.
- Revenue Growth: This is the company’s total sales. In simple terms it how you see that the company has the potential to keep making money and that its sales are increasing.
- Debt: What do the company’s liabilities look like? The same way you look at your account… look at the company’s financials. Is the company over-extended and how is there debt trending? Is it increasing or decreasing?
You’re ready? What’s next?
Once you’ve found a few stocks that interested in, you’re going to need investment tools. If you have more than a few thousand dollars to invest, consider working directly with a broker. But know what you’re signing up for. Brokers often charge commissions for executing trades, so get real familiar with their pricing structure.
Discount brokers include a few firms that you may have heard of, like Charles Schwab, TD Ameritrade, and E*Trade. Full-service firms (Morgan Stanley, UBS, Edward Jones, etc.) are great places to start if you have no interest in learning the market and/or have little to no experience in investments and want one-on-one guidance. You’ll likely pay higher commission fees for full service, but you’ll be able to ask a lot of questions and receive personalized treatment.
Don’t forget the apps
Apps offered by firms like E*Trade are a great place to start. Most offer the ability to receive real-time quotes and place trades right from your phone. Some offer ‘getting started tutorials’ as well as some general investment advice. Newer apps like Robinhood and Acorns are also a great option for low-fee no-frills starter investing!
It doesn’t stop there
With all investing there’s risk… so stay informed! Once you’ve invested there’s no guarantee that you will get back the money you put in. Keep an eye on your stock picks to know when it’s the right time for you to potentially get out of the company and sell your shares. But remember, although the stock market can be volatile, it can also be a great way to make amazing returns!