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 approaches 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, old 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 in 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 also select a mixture of stocks from small-cap, mid-cap and large-cap from different sectors.
Diversification will shield your wealth from different types of risks. Diversification does not mean that you should invest in different stocks as government policies or certain industry risk can wipe out your entire investments if all or majority of your stocks are from one industry.
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.