What to put in your portfolio

You can spend years reading, but eventually, you just have to do it! It may feel like a decision that’s rife with anxiety, but it doesn’t have to be. There are two things that will help you: Knowing which metrics to look at and understanding your personal preferences.

When you buy a stock, you purchase a small part of a company and become a part owner, called a shareholder. This basic definition can conjure mental images of crowded stock exchange floors with lots of people yelling and pointing and thumping their chests. (You can still do that if you want, there’s no rule against it.) Instead of running with a pack of wolves, know what you’re buying.

Key metrics can help you get a general sense, and they’re easy to look up. For example, you could look at the price-to-earnings (P/E) ratio of a company. The P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings.

In other words, it’s a measuring stick to see if a stock is overvalued or undervalued. A high P/E ratio could mean that  a stock's price is expensive relative to its earnings – aka possibly overvalued. Conversely, a low ratio indicates that the stock price is cheap relative to earnings and potentially undervalued. Keep in mind that P/E ratios are useful for comparing companies within the same industry but not companies in different industries.

No one metric will tell you the full story, so it’s best to look at several of them. This can be time consuming (although some people love this part!). Here is where you should check in with your personal preferences: Do you enjoy doing research and buying investments a la carte? Or would you rather make fewer decisions and pay a small fee for professionally managed funds?

If buying single stocks a la carte isn’t your jam, don’t worry. You can also invest in mutual funds or exchange-traded funds (ETFs), which are like baskets of investments. ETFs are professionally managed products that hold hundreds (or even thousands) of investments, with exposure across a variety of assets – stocks, bonds, commodities, etc. Beyond diversification, the way ETFs generally manage underlying investments and capital gains often makes them more tax efficient. You’ll pay a management fee for them, but because ETFs are managed passively, these fees are lower than actively managed investments like mutual funds.

Mutual funds are a means for investors to pool their assets to invest in stocks, bonds and other securities. The basic idea of mutual funds is similar to ETFs with just a few key differences in characteristics.

From the outside, stocks can look intimidating. But if you know the right metrics to look at and the right questions to ask yourself, you can mitigate much of that anxiety.

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