How to Build a Stock Portfolio

The stock market and its potential for risk intimidates many people. Nonetheless, a well built
stock portfolio, over time, will outperform other investments. It is possible to build a stock
portfolio yourself, but even if you work with a broker, understanding your goals as well as the
nature of the market will help build a successful investing strategy. Below are steps on how
to build a stock portfolio and how to evaluate stocks to build your portfolio with.
Method 1 of 2: Portfolio-Building Strategies
1Commit to investing over the long term. It is possible to make "a killing in the
market" by making a lot of money on a stock in a short period of time, but that
sudden gain can be wiped out by an equally sudden loss. A sustained presence in
the market is more likely to pay over time than trying to make a quick buck.
As part of investing over the long term, determine how much money you won't need
to touch for 5 years or longer and set that aside for investing. Money you'll need in a
shorter period of time should be invested in shorter-term investments.

2Understand the different kinds of stocks. Stocks represent an ownership
stake, or share in the company that issues them. The money generated from the
sale of stock is used by the company for its capital projects, and the profits
generated by the company's operation may be returned to investors in the form of
dividends. Stocks come in 2 varieties: common and preferred stocks. Preferred
stocks are so called because holders of these stocks are paid dividends before
owners of common stocks. Most stocks, however, are common stocks, which can be
subdivided into the categories below:
Growth stocks are those stocks projected to increase in value faster than the rest of
the market in general, based on their prior performance record. They entail more risk
over time but offer greater rewards in the end.
Income or value stocks are those that pay better dividends than other stocks. This
category can include both common and preferred stocks.
Blue-chip stocks are stocks that have performed well as either growth or income
stocks for a long enough period of time that they are considered safe investments.
They may not grow as rapidly as stocks designated as growth stocks or pay as well
at a given time as stocks designated as income stocks, but they can be depended
upon for steady growth or steady income. They are not, however, immune from the
fortunes of the market.
Defensive stocks are stocks for companies whose products and services people buy,
no matter what the economy is doing. They include the stocks of food and beverage
companies, pharmaceutical companies and utility companies.
Cyclical stocks, in contrast, rise and fall with the economy. They include the stocks of
such industries as airlines, chemicals, home building and steel manufacturers.
Speculative stocks include the offerings of young companies with new technologies
and older companies with new executive talent. They draw investors looking for
something new or a way to beat the market. Most of these stocks don't do well.

3Develop an investment strategy that meets your goals. Decide what type of
stock portfolio is most important to meet your overall financial goals. If making a lot
of money over time is important to you, you'll want to build a stock portfolio of largely
growth stocks, with some blue-chip and income stocks and possibly either a few well
timed cyclical stocks or well researched speculative stocks. If you need to earn a
continuing income from stocks, you'll want to build a portfolio composed primarily of
income stocks, with some blue-chip and defensive stocks for balance.
Understand that your financial goals may change over time and adjust your portfolio
over time. Generally, the younger you are, the more risk you can take and may be
better served with a growth-oriented portfolio, while the older you become, the more
you'll need a source of income and may be better served with an income-oriented
portfolio.

4Diversify your holdings. Regardless of whether you pursue a growth-oriented
or income-oriented strategy, you should rely on more than 1 or 2 stocks to make up
your portfolio. Investing in multiple stocks spreads your risk over several companies
and possibly several industries and classes of stock, depending on how you build
your portfolio. Ideally, poor performance by 1 or 2 stocks will be offset by significant
gains in the other stocks.
One way to ensure diverse holdings is to invest in stock mutual funds, either in
combination with or in place of direct stock ownership. Mutual funds are often good
for new investors to the stock market, giving them a chance to learn the ins and outs
of the market as they reap the benefits of investing.

5Invest regularly. Just as saving regularly can build your bank balance, investing
regularly can build your portfolio over time. Buying stock or mutual fund shares on a
regular basis lets you take advantage of dollar cost averaging, which lets you buy
more shares per dollar during times when stock prices are low and take advantage
of the increased value when prices are high.
One type of portfolio in which you can invest regularly without a broker's assistance
is a direct investing, or DRIP, portfolio. DRIP portfolios usually require a smaller
initial investment than most brokerage offerings because there are no broker fees,
and they let you start with a smaller number of stocks that you can research before
buying and track afterward.

Method 2 of 2: Evaluating Stocks for Your Portfolio
1Look at the price-to-earnings ratio. The P/E ratio, as it's abbreviated, can be
figured as either the stock's current price against its earnings per share for the last
12 months ("trailing P/E") or its projected earnings for the next 12 months
("anticipated P/E"). A stock selling for $10 per share that earns 10 cents per share
has a P/E ratio of 10 divided by 0.1 or 100; a stock selling for $50 per share that
earns $2 per share has a P/E ratio of 50 divided by 2 or 25. You want to buy the
lowest P/E ratio you can.
When looking at P/E ratio, figure the P/E ratio for the stock for several years and
compare it to the P/E ratio for other companies in the same industry and for indexes
representing the entire market, such as the Dow-Jones Industrial Average or the
Standard and Poor's (S&P) 500.

2Look at the stock's book value. The book value, or shareholders' equity, is the
theoretical amount that stockholders would be paid for each share owned if the
company went out of business. Stocks that sell close to or below book value are
considered cheap stocks.
Look at the reasons for the stock selling near or below book value as well as the
actual price. It may mean the stock is undervalued and is a bargain, or it may mean
that the company is having trouble.

3Look at the return on equity. Also called return on book value, this figure is the
company's income after taxes as a percentage of its total book value. It represents
how well the shareholders profit their investment in the company's success. As with
P/E ratio, you need to look at several years' worth of returns on equity to get an
accurate picture.

4Look at the total return. Total return includes earnings from dividends as well
as changes in value from the price of the stock and provides a means of comparing
the stock with other, non-stock investments.
5Evaluate the debt-to-equity ratio. This ratio is the company's book value
divided by its debts. The more money the company pays in bond interest or lines of
credits with banks, the less it can invest in its own future, protect itself from
downturns or pay dividends. Debt-to-equity ratios vary in different industries and
should be compared against other companies within the same industry to gauge
whether the ratio is acceptable or excessive.
6Observe the stock's volatility. How much the stock's price has changed in the
past is a good measure of how likely it is to change in the future. One measure of
volatility is beta, which compares the fluctuations of an individual stock against those
of an index such as the S&P 500. A beta of 1.0 means that the stock fluctuates as
the index does; a lower beta means it fluctuates less and a higher beta means it
fluctuates more.
These 6 factors are known as a stock's fundamentals, and evaluations using these
factors are called fundamental analysis. Another way to evaluate a stock is through
factors such as previous price changes, the ratio of advancing to declining stocks
and other related statistics. This form of analysis is known as technical analysis.

Step 1: Set specific goals
Before creating a portfolio, think about why you're investing in the first place. The more specific each goal is, the
better you can decide which investments may be right for you. Start by answering these questions:
How much money will you need? Remember to account for inflation when planning future expenses.
How much time do you have? When will you need the money? How long will it need to last? As a rule, goals
with longer timeframes require more aggressive investments.
How much risk can you tolerate? All investments involve risk. The key is to assume enough risk to grow
your portfolio, but not so much that you can't tolerate the market fluctuations.
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Step 2: Allocate your assets
Asset allocation is simply the process of deciding how much money to put into each of the three main investment
categories:
1. Stocks to grow your principal and beat inflation over time
2. Bonds to generate income and offset stock market risks
3. Cash to meet short-term needs and provide portfolio stability
Asset allocation seeks to avoid the risk of owning just one type of investment. Because different investments
don't always move in the same direction, you have the potential to offset any losses from one holding with gains
from others.
Your exact allocations depend on your unique needs. For example, if you have the time and temperament to ride
out market fluctuations, a stock-heavy portfolio may make sense. As you grow older or more conservative, you
may want to gradually increase bond and cash positions.
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Step 3: Diversify across investment styles
After allocating assets into each investment category, the next step is to diversify across their various sub-
categories, known as "investment styles."
For example, your stock allocations can include growth and value companies of different sizes, market sectors
and countries. Bond styles range from government to corporate to municipal, short-term to long-term, investment
grade to high yield, U.S. to international.
Each of these investment styles tends to react differently to market and economic conditions. When some are
rising, others may be falling. As a result, a broadly diversified portfolio is likely to fluctuate less than any one style
alone.
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Step 4: Select your investments
Instead of building a portfolio with individual stocks, bonds and cash securities, many people find it easier to
simply invest in mutual funds.
Mutual funds are managed by professionals and diversified across more securities than you can likely afford to
research, buy and manage on your own. It isn't unusual for a single fund to include hundreds of different holdings
so that no one security has too much influence on your total returns.
There are two ways to create your portfolio with J.P. Morgan Funds
Custom-tailor your own investment mix by selecting individual funds and deciding how much to invest in each;
or
Choose an asset allocation fund that makes these decisions for you. From a single convenient investment,
you receive a broadly diversified portfolio of J.P. Morgan Funds representing every major market worldwide.
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Step 5: Follow your plan over the long term
Many people make the mistake of switching investments or completely abandoning their portfolio during normal
market swings. In most cases, a better approach is to simply buy and hold the same sound investments over
time. If your personal circumstances or the financial markets don't change dramatically, then neither should your
fund mix.
Consider meeting with a financial advisor at least once a year to review your portfolio. Together, you can decide if
your current investments are still appropriate or if any adjustments are needed.