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How to Build a Stock Portfolio

A proven strategy for building a stock portfolio that gives decent returns while posing minimun risks. This is a long term strategy that has proven itself over 30 years of markets ups and downs.

There is no single strategy for being successful in the stock market. If we look at the great investors, Warren Buffet, T. Rowe Price and Peter Lynch, they all had different investment strategies. However, few people have the natural investment talents and insights that these men held. Below than is a strategy than can be used by the rest of us to earn high returns while maintaining minimum risks.

This stock portfolio strategy is based on 3 basic principles:
1. Diversify
2. Buy Quality Stock
3. Pay the Right Price

Here are these principles laid out in nine detailed steps.

1. Diversify
Buying several stocks in different industries will prevent wiping out your investments if any one industry goes down. This should be a minimum of 10 stocks in 10 industries. The more stocks, the closer your portfolio will mirror the market, but more than 50 stocks is overkill, and becomes difficult to maintain. 10 stocks in 10 industries should mirror about 85% of the market, and if you buy 20 stocks in 20 industries, you will just about have the market mirrored.

2. Restrict Total Investment
Restrict your stock portfolio to a small portion of your asset base.

3. Buy in Equal Dollar Amounts
When building your stock portfolio, buy your stocks in equal dollar amounts instead of round lots. In other words, if you have $20,000 to invest in 10 stocks, buy $2000 worth of each stock. If you buy an even block, for example 100 shares of an $80/share stock, the value in that stock will total $8000 and will make up 40% of your stock holdings instead of 10%. This will go against our goal in item 1, which is to diversify.

4. Buy Quality Stocks
Quality of the stock is sometime difficult to determine, but here are some general steps you can take to pick a high quality stock.
A. Large Company
B. A Standard & Poor rating of B+ or higher
C. A leader or one of the leaders in their industry
D. Has been around for many years
E. Has a history of paying dividends

5. Get Good Dividends
There are two reasons that you want to go with a company that pays dividends.
A. Dividends increase the total return more than capital gains alone
B. History shows that companies that pay dividend tend to fail less often

6. Convertible Preferred Stock
If the company you are interested in also has a Convertible Preferred Stock, you may want to buy this instead

7. Do Not Trade Often
High volatility will most often lead to a worse rate of return. As part of this, trading stocks often will create higher costs due to fees and higher taxes. Unless there is a compelling reason to change, you should hold onto stocks 3 to 5 years.

8. Buy When Stock is Down
Do not buy stock in a company when it is making the front cover of Business Week for it's success. By this time the stock has already gone up and you will be buying at a peak. Instead buy when the company is down, but from your other research you know it is a quality company and will recover.

9. Have Patience
As stated in item 7, you should plan on holding on to your stocks at least 3 to 5 years. You should sell the stock when the reason you bought the stock is no longer valid. Also consider selling a stock from a company that is going through a merger. Usually you will be offered a higher price at the time of the merger and most likely the company will change and not be the same company you selected.
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