Creating & Maintaining A well-balanced stock portfolio

info · Joined: 07 Feb 2005 Posts: 23

Picking stocks for your portfolio

Although there are thousands of publicly-traded companies, the core of your stock portfolio should consist of financially strong companies with average to above-average earnings growth.

A well-balanced stock portfolio should consist of 15 to 20 stocks, across seven or more different industries -- and you don't have to buy them all at once.

Since you want to be able to hold your stocks for a long time, they should offer a total return higher than the 10 percent historical market average. You can estimate the likely return by adding the dividend yield to the projected earnings growth rate for a stock with 11 percent earnings growth and a 2 percent yield could provide a 13 percent annual total return (!).

As a general rule of thumb, stocks with moderately above-average growth rates and reasonable valuations are the best to buy into. Statistically, high-growth stocks are usually too overpriced and may have a harder time meeting (inflated) investor expectations.

The first thing to look at is the stock's P/E (price/earnings) ratio compared with its projected total return. Ideally, the P/E should be less than double the projected return (a P/E of no more than 30 for a stock with 15 percent total return potential is recommended).

A good well-balanced portfolio might include a couple of industrials with 9 percent growth rates and 3 percent yields, selling at 17 P/Es. Consumer growth stocks with 13 percent growth rates and 1 percent yields, at 23 P/Es.

Perhaps also a couple of tech stocks with 25 percent growth rates and high P/Es (don't overdo it on those, they are normally in the high risk category). If you can average a 14 percent return over the next 10 to 20 years, you'll reach your financial goals -- and can expect to probably outperform most pros as well.