How to Build a Balanced Stock Portfolio for Higher Returns

Different individuals have different preferences when it comes to investing in stocks in terms of their preferred investment periods and required rates of returns. For the long term investors, they believe in the power of fundamental analysis before investing their money in any given stock. On the other hand, the short term traders believe in Chartism and technical analysis to guide them in making the right stock picks as well as in knowing when to enter and exit the market profitably. Both schools of thought are right in their own arguments which are equally valid. However, to maximize your returns in any given market, a balanced portfolio is very important.

Building a balanced stock portfolio might not come naturally to an individual who has been biased towards either long term investing or short term trading. This is due to the fact that you are already used to your way of making investing or trading decisions such that you will need a complete mindset reconfiguration to adapt to a hybrid decision making process that involves mixing both technical and fundamental analysis technics. To begin with, you must first understand the benefits of each type of stock investment and then have a high level view of the technics used in analyzing markets and individual stocks under both investment strategies.

Short-Term Trading

Short term traders of stocks are a very important component of the stock market due to their role of creating liquidity within the markets. Through their daily speculative transactions, short-term traders enable other traders to enter or leave the market at ease without having to wait for too long to find a buyer or seller for a given stock. Beside their market creation benefit, short term traders also stand to gain from the random sharp increases or decreases in share prices from time to time as market information and earnings reports sway stock prices. As a short-term trader, you are guaranteed of frequent returns and your liquidity is enhanced in case you find other lucrative investment vehicles and you want to exit the stock market.

As a technician or chartist, you will need to learn how to read stock market charts and understand the indicators for the specific stocks you are following and then make purchases and sales at the opportune moment when you are maximizing your returns.  One way to ensure you that you are not lost in the noise within the stock market in any particular hour of the day; is by trading the MACD (Moving Average Convergence Divergence) which gives you signals as to when to buy or sell a given stock. Using a nine day average, the MACD histogram shows you when the price goes below the nine day average for you to make a purchase and presents you with selling opportunities when the prevailing stock price goes above the nine days average.

Other technical analysis indicators at your disposal when involved in short-term stocks trading include relative strength index, Bollinger Bands, Money Index, and Stochastics among others.

Long-Term Investing

For long term investors, they are excited by growth stocks that report higher capital gains every year. Stocks that grow their market capitalization significantly year over year and at the same time pay out significant dividends are the ultimate dream for long term investors. In the mind of the long-term investor it is the growth potential in the business behind the stock he purchases that matters and not the day to day share price fluctuations. Long term investors have a common thing with private equity investors in that they both commit their money for a long period of time with the hope that the company will grow over the years and then they will sell off their stocks at huge margins.

To be a long term investor, you will need to master the art of looking beyond the quarterly and annual financial reports released by listed companies. Up and above analyzing the financial statements to see how the business is performing in terms of earnings, long term investors delve into fundamental analysis of the company itself and its operations. This involves looking at the market share of the company and the projected growth of the same; analyzing the competition the company faces both currently and in the future and determining how strong its competitive advantage is in the long-run.  Essentially, you will be concerned with not only the ability of the business to continue operating profitably in years to come; but how it will do so competitively and while growing its market share. This calls for thorough financial analysis and you might need the help of a financial analyst to get your projections right.

Hybrid Portfolio

From the above it is very clear that short-term investments guarantee you regular income while on the other hand, long-term investment provides you with the opportunity to benefit from huge capital gains in the long-run. To benefit from both, it is advisable to build a balanced portfolio that has 50% short-term stocks and 50% long-term shares. This way, you will not only maximize your returns, but you will also be reducing your risk exposure both in the short term and in the long-run by having a diversified portfolio.

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