By Dan Caplinger | More Articles
October 23, 2009 | Comments (4)
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When it comes to setting up a winning portfolio, picking the best investments is essential. But what stops many potential investors from ever getting started is the mistaken impression that you need a huge amount of money before you can begin implementing a smart investing strategy.
I'll admit to being guilty of giving advice like that in some of the articles I've written. From time to time, I've suggested that people drop $5,000 into a Roth IRA or buy 100 shares of half a dozen different stocks, even while I know that most people don't have thousands of dollars sitting around. And although mutual funds and direct stock purchase plans let you get started with $100 or less, you may well want to strive for the bigger rewards that choosing individual stocks can give you.
So, if you're tired of hearing advice that you can't afford to take, let me tell you how you can prioritize your investing without giving up on your ultimate goal of financial independence.
Where you are
The key to putting together a successful stock portfolio is to realize that you don't have to do everything all at once. When I first opened a discount brokerage account, I started with a single stock. Every month, as I slowly saved up money, either I'd buy a few more shares of a stock I already owned, or I'd pick another stock to add to my portfolio.
But that doesn't mean you should just pick stocks willy-nilly. The best way to concentrate your attention in the right place is to take a good, hard look at your time horizon and risk tolerance. That should get you pointed in the right direction.
In particular, here are some thoughts on how people in common situations can best start a stock portfolio.
When time is on your side
The earlier you start saving for a long-term financial goal like retirement, the more options you have. If you want to get a head start on your retirement saving, then you have enough time to take on some significant risk.
To make the most of the opportunity you have, take a close look at small-cap stocks. Over time, smaller companies outperform their larger rivals, and as they grow, they give you the potential for explosive growth. Stocks like Dynamic Materials (Nasdaq: BOOM ) and Innophos Holdings (Nasdaq: IPHS ) might make your portfolio a bit volatile, especially at first, but the chances of earning a high return on your investment are better than if you buy more mature companies with fewer prospects.
When things are more urgent
On the other hand, if you waited a bit longer before starting to save, you're in a more awkward position. You may need more growth from your portfolio to reach your goal, but you also don't have as much time to ride out downturns.
The best choice is to split the difference. Pick a high-growth stock like Intuitive Surgical (Nasdaq: ISRG ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) to begin your portfolio. But rather than sticking with those names, use your additional money to balance out your portfolio with a safer, value-oriented stock such as Chevron (NYSE: CVX ) or Fairfax Financial (NYSE: FFH ) . That way, you won't be taking a complete gamble with all of your money.
When it's already crunch time
The most difficult situation is when you don't have much time at all left to invest for a particular goal. If you only have a year or two, buying any stocks is a crapshoot -- you could hit the next bull market or another terrible year like 2008.
With five years or more to go, though, you can afford to build a conservative portfolio. You can stick with a value strategy, but another idea is to look for good dividend-paying stocks. Dividends help investors with short time horizons because they provide much-needed income. Often, you can find value stocks that pay good dividends; Chevron, which I mentioned earlier, pays around 3.5%, while Merck (NYSE: MRK ) pays 4.7% and has a P/E ratio of just 12.
So, if you don't have enough money to buy dozens of stocks all at the same time, don't let that stop you from investing at all. Even if you just begin with a single stock, you can set the wheels in motion that will eventually lead you to the portfolio you've always wanted to owN.