Picking stocks is very exciting, picking the wrong ones can be hypertensive. Believe me, a sudden drop of 20% in your stock pick can cause you myriad health problems. Ask those that had investments in Worldcom or Enron- life was hell. In this short piece my aim is to help us pick our 5 stock- which I want to call the Beginner's Portfolio. There are two rules in stock picking that you need to know. The rules are simple: Know the company. The second rule is : Thou shall not forget the first rule. This rule allows you to avoid picking the dogs of the show on one hand eg. a DRL or GM or Ford, but also prevents you from selling dirt cheap a damaged stock eg. AIG. If you know a company and how it makes it money by doing your research, then you will not buy and sell at rabid market movements. You will allow dollar cost averaging and dividend yield work in your favor all the way. Above all, you will know when to sell.
For any beginner, there are two stocks that should make your list automatically. The first stock is your bank. Your local bank will make you heck lot of money. There are few banks out there that don't make money- ever wondered why the financial sector makes up over 20% of the S & P 500? Ever wondered why they don't lose money? Heck! You keep money with them. So if your bank is Bank of America buy BAC, if yours is Citi buy C, if yours is JP Morgan buy JPM and if you are sitting on a great mowback with Buffet buy Wells Fargo. The second stock you want to own is either your favorite retailer e.g. Walmart, Target, Kroger etc. or your uitility e.g. TXU Energy, Time Warner, Excelon - which are by the way great investments with commonly comfortable yields.
After choosing these two stocks, you still owe me three more. Any balanced portfolio must have a small cap stock and an international stock. Small cap stocks are historically known to outperform the larger market simply because that is where you find growth, but like international they are volatile. The world is a global village and if you dont want to be punished for living and investing in a mature market you need some ChinoIndia plays. I will never advice you to go out there and buy just one stock. Instead, buy an ETF. ETFs are great ways to play the market- in these past yeat many of them just seem to defy the law of gravity. Simply put, Exchange Traded Funds are mutual funds that you can trade on the market like stocks- most of them have dividend yields that commonly pay off the expense ratio and some change! ETFs are best of both worlds- in one ETF you are effectively insulated from the shock of owning stocks while being diversified same time and capturing the gains of one particular sector. Small cap ETFs include PBW or DSG or PWT - you can get some picks here. Foreign play is best for emerging markets like Brazil, Mexico, China, India or Japan. You have to make a choice - though I like the exposure of Australia or Honk Kong ETFs like EWH and EWA since they trade stocks in the whole wide region from Taiwan to South Korea to even the booming malaysian or indonesian economy.
Now our stocks are four.: Your Bank, Your Retailer or utility, Small Cap ETF, International ETF. The last breed of stock you should own is a speculative play. Before you choose this breed, you will need to do your research. This is your opportunity to either break the bank or lose money. Either way you cannot have more than 20% of your net portfolio in this baby even though making money over the short term will tempt you. Your speculative stock must meet certain criteria of future worthiness, for more on this go here. In this day and age it can be a biotech stock, or a nano tech play. You know something of the future. But the key is knowing when to buy or sell. With this sort of portfolio you can reach for the sky and smile to the bank. Take care- pick carefully, but act swiftly because the most money is lost when you dont act on your instincts.