While in a time or two, other investment vehicles have outperformed stocks, it has been proven to be the most reliable. What type of stocks is right for you? There are several options: individual stocks, index funds, mutual funds, index funds, ETFs, domestic, and foreign. Before choosing, here are a few pointers to serve as guide for the inexperienced and experienced investor alike.
Personality type
Different personality types are well-suited for particular types of stocks. Generally, there are three kinds of investors – risk taker, risk averse, and middle. If you are not inclined to risk and want to stay safe and sure, go for mutual funds or index funds. Because these are well-diversified and contain different stocks, going for them reduces risk and does not entail individual stock research.
Time factor
Deciding to invest in stocks, funds, or both depends on how much time you are willing to dedicate. Individual stocks are the most time-consuming because investing in them requires research, judgments on earnings, management, and future prospects. Mutual and index funds are less time-consuming since the fund manager picks stocks for you. Index funds are even simpler since they move according to type of market or company they track.
Diversification
Do not invest in only one type of asset. It is potentially disastrous for your portfolio. Spread your assets across different sectors such as real estate, commodities, insurance, etc. Consider diversification across asset classes as well.
Recommended portfolio
For beginners: a portfolio for the inexperienced would consist of a couple of index funds. One index fund to track the broad market and one to give foreign exposure will be a boost.
For individual stocks: a portfolio composed of 12-20 carefully selected individual stocks will give you diversification and is just enough for you to follow regularly. For those who do not have or do not want to invest time on following many stocks, a portfolio mix of individual stocks and index funds is favorable.
