Introduction to Portfolio Management
How many stocks should I own?
There’s no one-size-fits-all number of stocks you should own, but you should diversify your portfolio to include stocks from a range of sectors to reduce risk. ETFs and mutual funds that track broad-based indexes like the S&P 500 or Russell 3000 are an excellent way to diversify your stock portfolio.
Do I have to pay taxes if I rebalance my 401(k)?
No, you won’t have to pay taxes on the sale of any appreciated assets within your 401(k) during rebalancing. Your capital gains in a 401(k) aren’t taxed until the money is withdrawn from the account. Selling assets to rebalance a regular brokerage account, however, will incur taxes.
What is the most volatile sector?
Historically, the energy sector has been very volatile compared to the broader market. S&P Global research found that over the course of the 2010s, the energy sector had a standard deviation of 20.3%, nearly double that of the least volatile sector, consumer staples (10.7%). The energy sector is susceptible to unpredictable and dramatic swings in the price of oil.
What industries outperform during recessions?
Some bright lights for investors during recessions can include consumer staples, groceries, alcoholic beverages, cosmetics, and discount retailers. Companies in these spaces either offer consumers essential items, non-essential goods at the best price, or small luxuries and comforts that people can and want to make room for in tighter budgets.
A portfolio is an individual’s or entity’s collection of investments, which can include conventional investments like stocks and bonds, as well as non-conventional investments like art, real estate, or rare collectibles.
Time-Weighted Rate of Return
Time-weighted rate of return is a measure of a portfolio’s compound rate of return that controls for the inflow and outflow of cash.
The efficient frontier is a graphic representation of the ideal balance between risk and return in an investment portfolio. The frontier consists of portfolios that no other portfolio with the same standard deviation (i.e., amount of risk) can be expected to outperform.
Cost basis is the original value of an asset, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions. The cost basis is used to calculate an asset or portfolio's returns and, for tax purposes, capital gains.
Overweight can refer to an investor’s decision to invest more money in a certain sector or industry compared to a benchmark, like the S&P 500. Overweight is also a designation analysts assign to companies they believe are likely to outperform their peers.
The Martingale system is an investment strategy that involves doubling down on losing investments by buying more as prices drop in an effort to recoup those earlier losses when the price eventually increases.
Real Rate of Return
The real rate of return is the annual percentage of profit on an investment after factoring in taxes and inflation.