If you’re building a stock portfolio, you’ve got a lot of choices set before you - especially if you have a sizable budget to work with. How, then, do you know which ones to choose? It’s not an easy decision, and there are dozens of different schools of thought, tools and strategies. The first step, then, is to understand the different paths available to you.
These four stock selection paths are just the beginning, but they can help you get a better sense of what might be right for you. And remember, whether you’re drawn in by expert advice regarding high-value stocks or are more interested in penny trades, there’s always room to combine strategies or adjust a path to make it uniquely your own.
A few great stocks
Particularly for those with the financial resources, one of the most common investment strategies is to choose large amounts of a few great stocks. This is what Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) does with its accounts, and both Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) endorse the approach and its underlying philosophy - essentially that there are only a few good choices and that by carefully researching a handful of stocks, you can put the full weight of your knowledge into investing in stocks you really believe in.
Try an API
Many investors, overwhelmed by the sheer number of stock choices, take as their strategy a contextual, research-driven approach. This can be a lot of work, involving looking up the history of the stocks, researching industry trends and other data. Luckily, there are tools that can help. By using a stock API to evaluate individual stocks, test trades and model different scenarios, you can get a better sense of what stocks might be right for you.
Emphasize active management
Some investors are in it for the long haul. They specifically choose stocks they know will be stable over the long-term, self-correcting and ultimately coming out on top. Logically, this makes perfect sense. It’s reliable and low stress, but it’s typically not a very profitable approach because anything you can ignore for weeks or months at a time isn’t making the kind of big moves that drive profit. That’s why it’s time to consider an active management strategy.
Mastering active stock management is not only critical for taking on potentially more profitable but volatile stocks, it’s also an important skill to have when the market is undergoing contractions, as it is during our current recession. Sometimes there’s just no buffer for passive investing, and we’re living through one of those moments.
Find the passive options
Economic recession can cause serious market fluctuations, but there are always a few approaches that will enable passive management, even under extreme conditions. In particular, investing in ETFs - exchange-traded funds - can provide for that kind of hands-off investing. So why do they work?
The advantage of top ETFs is that they can help diversify your portfolio, tend to be more affordable to manage and ETF trends can help reveal broader market activity. Additionally, ETFs offer certain tax benefits, adding to their appeal.
Finding a way forward
Every book and blog will suggest different investment strategies, and top stocks fluctuate by the week, but as an independent investor, you have to devise a strategy that makes sense for you. That might mean using an API alongside certain trusted advisors, research or diversification approaches. Maybe you’ll find you’re fascinated by penny stocks or you like uncovering new biomedical or tech stocks. Ultimately, what sets successful investors apart from the rest is that they combine financial calculations with passion and intellectual engagement. What fuels that for you?
Disclosure: I do not own any of the stocks mentioned in this article.
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