Stocks are considered as a great tool for wealth building. It can play a role in all short of investing strategies. Based on your age, financial condition and other requirements, you need to decide how to approach stock investing.
Role of stock in your wealth building depends on your approach and investing strategy.
We have two types of approach to stock investing: conservative and aggressive. We have already discussed it in one of our article best approache to stock investing.
Some stocks are suitable for conservative style of investing and some are for aggressive style. You have to choose the stock that matches your investing style.
Aggressive style of investing is suggested for young investors who can take risk. It does not mean that old investors should not buy growth stocks, they can buy with proper financial planning as there is no guarantee in the stock market. Which means, based on the financial situation, investors can try investing in growth stocks.
Choosing growth stock is not a bad idea, the problem with growth stocks is that it may backfire. If you are not ready to take that risk, then it may spoil your entire financial health based on your investments.
Based on your risk taking capabilities, you can diversify your portfolio by investing 30% of your portfolio in growth stocks, 40% in value stocks and 30% in income stocks. It may not be the right proportion for you. You can change it based on your investing style and risk taking capabilities. But, diversification is a must to minimize risk in the stock market.
You can select a mixture of small-cap, mid-cap and large-cap stocks from difference sectors to have a better diversified portfolio.
Diversification will shield your wealth from different types of risks. Diversification does not mean that you should invest in different stocks of one sector as government policies or industry specific issues can wipe out your entire investments. Therefore, having a number of stocks from one industry is not diversification.
You need to invest in stocks across different sectors.
If you are married and about to retire, your family commitments and financial obligations will be more. In such a case, you can have a mix of conservative and aggressive approaches. As i said before, it all depends on your financial condition.
You can consider buying large cap stocks and defensive dividend paying stocks into your portfolio by keeping less number of growth stocks.
If your financial situation improves, you can change your strategy to be more aggressive.
Experts suggest having a conservative approach when you are about to retire. Fundamentally strong dividend paying defensive stocks and large cap stocks are better in such a situation.
If you are new to the stock market and do not have much time to learn the fundamentals of the stock to invest, better to go for a mutual fund or take help of a financial expert.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.