by Alison Storm | 03/5/10
Do you like to play it safe or are you more risky with your money? Every stock has its own level of volatility-- some just fluctuate far more than others. The important thing is choosing stocks that fit your comfort zone and life situation. According to CNN Money's Michael Sivy, there are actually very few publicly traded companies that represent financially strong companies with above-average earnings growth. He says that of the 6,000 publicly traded companies, fewer than 5% would be good choices for investing. "Surprisingly, there are only about 200 stocks that fit that description," Sivy writes. "A well-balanced stock portfolio should consist of 15 to 20 stocks, across seven or more different industries -- but you don't have to buy them all at once."
Financial guru Dave Ramsey says once you have paid off your debt than you can focus on investing. He tells people to put 25% of their money into the following four types of funds:
- Growth
- Growth & Income
- Aggressive Growth
- International
Dave says to completely turn away from the idea of buying individual stocks as part of your investment plan. He says over time, they don't generate the same level of return as you experience with mutual funds. But if you really feel inclined to invest in a single stock, make sure it's just 10% of your investment portfolio.
Sivy, however, sees no problem with investing in single stocks as long as you choose the right ones. He says choose stocks with moderately above-average growth rates and reasonable valuations if you're looking for the best deal. He says high-growth stocks are typically overpriced and don't live up to expectations. "The first thing to look at is the stock's price/earnings ratio compared with its projected total return," he writes. "Ideally, the P/E should be less than double the projected return."
A well-balanced portfolio according to Sivy would include the following:
- a couple of industrials with 9% growth rates and 3% yields, selling at 17 P/Es
- consumer growth stocks with 13% growth rates and 1% yields, at 23 P/Es
- a couple of tech stocks with 25% growth rates and high P/Es
No matter which philosophy you follow, it's important that you're investing in a way that you're comfortable with. Be realistic about your own involvement and knowledge of the stock market. Consider your age and how much time you have until retirement. Can you afford to try more volatile stocks? Make sure you're making educated decisions because, after all, it's your future that you're investing in.