Time to Build a Portfolio
So you have decided it is time to take the plunge and build a portfolio. Do
you have enough money to make this move? Well, you might be surprised to lean
that for as little as $50 you can start buying mutual funds, and for as little
as $25 you can start buying individual stocks.
Not so long ago, brokerages and other financial institutions ruled the
investment world. Stocks traded in round lots of 100. Mutual funds regularly
raised their investment minimums, locking out the little guy. Small investors
needed courage, dedication and ingenuity to get a toehold in the stock market.
But, today it is as easy to build a portfolio on a tight budget as it is to
start investing with a million bucks, thanks chiefly to the changes forced on
the investment world by the Internet.
Even if you are a beginning investor, think in terms of building a portfolio
rather than of buying one or two stocks or a couple of mutual funds. A portfolio
is a collection of investments like stocks, artwork, bonds, gold and real
estate. Your portfolio consists of all the assets you own. It represents the
choices you have made with your money. Beginners are usually advised to start
with mutual funds because each mutual fund represents a portfolio, too, in this
case a portfolio of securities. It might be stocks, or bonds, or both. When you
look at the prospectus, you will find out what the manager buys and what is in
the portfolio. Planning and diversifying will serve you best in the long run.
Regular investments, monthly is best, are important in building your portfolio.
Many good fund groups waive their initial minimum investments, which might be
$10,000 or more, if you are willing to make regular investments deposited
directly from your paycheck or bank account.
This type of regular, systematic investing is the very best way to invest in the
stock market. That is because it takes advantage of a strategy called
dollar-cost averaging, a method of buying stock or mutual fund shares by
investing the same amount of money on a regular schedule regardless of the
market price. Studies show that investors who use dollar-cost averaging pay less
per share on average than those who purchase shares in a lump sum.
Regular, systematic investing also imposes an important discipline. One of the
biggest mistakes novice investors make is buying and selling with their
emotions. When the market soars, they buy; when it sinks, they sell, just the
opposite of what a successful investor does. Signing up for an automatic
investment program puts you on automatic pilot and removes the temptation to try
to time the market.
Even though each mutual fund is a portfolio, one fund is rarely enough for an
investor. Also many investors have worked up an appetite for individual stocks.
Stocks, too, can be added to your portfolio. Many companies permit investors to
buy stock directly from the company by using the same type of regular monthly
investments just described for mutual funds. These programs go by the names of
Dividend Reinvestment Plans (DRIPs) or Direct Stock Purchases (DSPs).
The drawback is that many of the most popular technology companies do not
participate in these direct investment programs. In addition, many companies
have added steep fees to the direct plans. Now, thanks to the Web, there is a
better way to dollar-cost average into stock. Many stock purchasing sites allow
you to make trades on shares of your choice for low per trade fees.
Although small investors can buy stocks, we still recommend a mutual fund or
funds (or a similar index-based investment trust) as a core holding. You could
budget $100 a month for investments and decide to put $50 in an index and $25 in
each of two stocks.
How broad should a portfolio be? - Buying a large number of different stocks
is time-consuming and distracts from focusing on the best stocks. Most investors
cannot keep track of a large portfolio, so it is best to concentrate on just a
few securities. A guideline for beginners is:
One way to save on fees is to lump them together. Suppose you put $100 in the
index the first month, then $100 in the first stock, $100 in the index, $100 in
the second stock, $100 in the index and so on. Then you would only have one
monthly transaction fee.
Remember that successful investing requires discipline. It requires a plan.
Develop yours and then stick with it.