Picking the Right Mix of Stocks
Stocks can make your portfolio grow, but allocating 90% of your portfolio to a single market is a terrible mistake. Diversification is crucial when investing in equities. It’s also important to pick stocks or funds that will likely perform well.
Investing in large, well-known companies is a tempting option due to the many unknown factors that come into play when buying shares of smaller businesses. However, historical data reveals that the higher returns usually come from small companies that become successful.
The best approach is to create a mix of safer stocks from large companies that will still be around when you retire and stocks from promising small companies.
There are two ways to justify purchasing shares of a company. Try to include a mix of stocks that fall into these two categories:
- Growth stocks. These stocks have a good potential for high returns. Think tech startups and other emerging markets.
- Value stocks. These stocks are a good addition to your portfolio because they are likely to retain their value, you feel that you get a good price, and are comfortable with investing in this company. This category includes major chains and most stocks with dividends.
A company’s size and value is another thing to look at when picking stocks. Ideally, include a mix of shares from companies that fall into these categories:
- Large cap. This category includes huge retailers such as Walmart or Amazon.
- Mid cap. These well known companies usually dominate their market. Your local energy provider is more than likely a mid cap company.
- Small cap. These companies still have potential for growth. Most holding companies belong to this category.
- Micro cap. This category includes small businesses and startups.
The smaller the company, the higher the risk usually is. But from a historical point of view, small companies yield the highest profits. On the other hand, investing in large cap companies is a safer approach but yields lower returns. This is why diversifying with a mix of growth and value stocks as well as a mix of cap sizes can help you make the most of your portfolio.
“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” Dave Ramsey
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