So you're ready to branch out from investing in mutual funds to buying some individual stocks. But you're not quite sure how to go about it. Successful investors know that the only way to learn how to separate winning stocks from losers is to get your feet wet slowly and smartly, says Ticker magazine.
"The objective is not to find the next Amazon.com -- though that would be great -- but to construct a portfolio that offers a comfortable balance of risk and reward."Such a strategy means owning about a dozen stocks, says Ticker. But you can begin with just a few, or even one. Then, when you're able, you can increase your existing positions or add another stock or two to your holdings. Ticker believes that the short-term goal should be to own a meaningful number of shares of several companies.
Although there are thousands of stocks now trading, beginning investors can make rational selections if they keep a few basic principles in mind, says Ticker. Legendary fund manager Peter Lynch, for example, often extolled the virtues of buying what you know -- the stocks of companies whose products or services you have used or whose quality you trust.
Good stocks come in all sizes, but novices should concentrate on established large-cap issues, according to Ticker.
"Such blue chips have a track record, an established brand and a reliable earnings stream. There's also plenty of information available about them. That's not always the case with small or young companies. (The Securities and Exchange Commission posts filings online at www.sec.gov."
Diversify, diversify, diversify, advises Ticker. Spreading your risk can help keep your returns afloat whether the economy is heating up or cooling down. The best approach is to select high-quality large-cap stocks spread among the 12 main sectors of the economy. That's energy, financial services, technology, utilities, health care/pharmaceuticals, transportation, basic materials (including such commodities as paper, chemicals and plastics), capital goods, services, conglomerates, consumer cyclicals and consumer noncyclicals.
Profits of companies in the basic materials, capital goods, transportation and consumer cyclicals sectors can be depressed for years at a time, so investing in them requires a long-term commitment. But if you choose your stocks carefully, says Ticker, you can get exposure to these sectors without having to place too concentrated a bet on any one stock.
Ticker would begin a basic portfolio with a handful of U.S.-based market leaders. Its favorites: IBM, GE, American Express, Merck, Wal-Mart, Anheuser-Busch, Microsoft, Bank of America, Exxon, Southern Co.
Market risk can never be fully avoided, concludes Ticker.
"But that doesn't mean you should sit on the sidelines. The S&P 500-stock index returned an average 11.2 percent annually between 1926 and 1998. But if you'd missed the best-performing month in each of those years, your annualized return would have been a measly 2.6 percent."
(Ticker, 125 Broad St., New York, NY 10004; monthly, $22.95 annually)
This column is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.