How Can Retail Investors Choose Stock Portfolios?

Investors commit a lot of time to their portfolios. At times, stock picking can seem like a lost art. Under constant pressure from passive investing, mutual funds, and ETFs, buying individual stocks is minor and less common.

New retail investors still typically view buying single-picked equities as the essence of investing. Much financial education literature aims to ”correct” them of this opinion. The rationale for this is that stock pickers underperform the overall market.

This statement is true.

But that doesn’t necessarily mean a retail investor shouldn’t buy individual stocks, or at least know how to. Most advise holding a broad index, passive fund, or low-cost actively managed equity fund to gain your broad equity exposure necessary for retirement.

This decision is wise.

But there is no reason retail investors cannot additionally buy individual stocks where they’ve researched and believe the investment case.

Retail investors should avoid having a retirement portfolio based on just three or four stocks. Equally, hundreds of tiny individual holdings are unlikely to be a cost-effective strategy once fees are considered. Balancing the two extremes can be challenging work.

Table of Contents

Active investing

Once a retail investor decides to add some of their selections to their portfolio, usually in addition to a ”base” or ”core” holding of a broader index, it’s time to start their research. Identify the sector and geography they want to invest in.

Steel manufacturers in India, for example. Find out the stock price of major companies in this area. Some companies may not be publicly traded.

How Can Retail Investors Choose Stock Portfolios?

Fundamental analysis provides the bedrock of a retail investor’s investment case. Looking at the balance sheet, performance, and multiples, such as the Price-to-Earnings (P/E) ratio, gives you some idea of the company’s overall health.

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Once retail investors are happy with their investment case, they can choose from the selected stocks, the ones with the best metrics, especially if they look undervalued.

When comparing the P/E – price-to-earnings ratio, look at the average of other companies in the industry. Generally speaking, a lower price-to-earnings (P/E) ratio means the stock is less valued than its earnings. Sometimes a well-known store will extend its price-to-earnings (P/E) ratio beyond its peer group. Sometimes this represents irrational exuberance – other times, the company’s prospects.

Finally

It’s time to think about market timing. If retail investors are going to hold these stocks long-term, this is, at best, a secondary consideration. Month-on-month fluctuations shouldn’t affect 50-year investment returns.

If your timeframe is shorter or your stock is severely overvalued, try to time the market using technical strategies. Remember, different industries have different standard multiples. You cannot compare the P/E ratio of a tech and tobacco company.

Hedging stocks

Whatever stocks you buy, it’s a good idea not to expose yourself to lopsided risks. If all the stores in your portfolio are German car manufacturers, you are vulnerable to a shock in that sector, wiping out the value. Some sectors, such as manufacturers and miners, are viewed as correlated.

How Can Retail Investors Choose Stock Portfolios?

Others, such as consumer goods companies and miners, are not. Remember that in a severe market correction, all stocks will probably decline. Those seen as safer will recover quicker.

Geography and sector are essential, but investing in a well-funded, profitable company is the best protection. Always check their annual reports and statements to confirm your investment is going into a company capable of paying its debts.

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How to trade

To trade stocks, you will require an online brokerage platform. Many banks and brokerages exist that are happy to help a retail investor open a new account and begin investing. In some countries, tax-favourable versions exist that allow you to invest a certain amount annually with reduced tax requirements. A financial advisor can help avail a retail investor of these opportunities.

Banks such as Saxo bank offer free platforms and information on stocks, allowing you to compare your holdings with different portfolios and past model performance and generally improve your level of financial literacy. This can be helpful if you want to see how your stock picks fit into overall portfolio performance.

Conclusion

Remember, as a retail investor; you must always do your research before investing. It’s better to wait until you are sure than rush into a bad deal. Most stocks are very liquid, so you can quickly sell them if you decide you no longer want the holding.

However, they are also a relatively volatile asset, and you could lose a significant amount of money in the meantime.

That said, equities should be the bedrock of any investment portfolio. They are by far the best returning long-term asset globally. Understanding how to screen and pick equities is one of the most critical skills a retail investor can have.

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How Can Retail Investors Choose Stock Portfolios?
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