How to Select Stocks for a Balanced Portfolio

The goal of stock selection is to find stocks that will provide the best return while minimizing risk. Stock selection is based on multiple criteria such as investing style, skill, risk tolerance, resources, goals and time frame. The aim of a balanced portfolio is diversification – that is, minimize investment risks by holding several asset classes with limited correlation such as stocks, bonds, commodities and real estate so that a decline in one asset class may be offset by superior performance of another. The prudent approach to balancing a portfolio also affects stock selection.

Balanced Portfolio Criteria

Every investor, whether conservative or aggressive, can benefit from a balanced portfolio; however, portfolios can be balanced in different ways. A conservative, income-oriented investor might benefit the most from a mix of large-cap, dividend-paying stocks and U.S. government bonds; an aggressive investor might combine small-cap stocks, junk bonds and commodities/futures. A day trader may offset the high risk of frequent stock trading with low-risk U.S. government or high-quality municipal bonds. The type of portfolio an investor wants to construct determines the types of stocks he should select.

Stock Selection Criteria

Most investors employ a mix of fundamental and technical analysis to select stocks. Fundamental analysis identifies the strongest stocks financially; technical analysis determines the best time to buy them. This method of selection, however, is likely to produce too many portfolio candidates. To narrow down the choices, an investor may apply additional criteria based on his particular portfolio requirements and investment goals.

Free Stock Screeners

One way to combine multiple stock selection criteria in a single search is to use a free, online stock screener. Most screeners allow you to input multiple fundamental and technical criteria, which you can develop and refine based on your balanced portfolio strategy. The strongest stocks usually come from the leading sectors, but a sector may contain dozens, even hundreds, of stocks, large and small, stable and volatile, cheap and expensive, leaders and laggards. By adding and refining additional screening parameters, an investor can select the leading stocks within a sector that best fit his portfolio requirements.

Developing Additional Selection Criteria

It may take time and practice to translate stock portfolio selection requirements into stock screening parameters, but more sophisticated stock screeners help quantify just about any selection criterion. For example, an investor can use price range, float and trading volume to assess a stock’s volatility. Generally, the lower a stock’s price, the more volatile and risky it tends to be. Float is the number of shares outstanding that can be freely traded – the lower the float, the more volatile the stock. Daily volume is the number of shares traded daily. The lower the daily volume, the more volatile a stock can be. A conservative, income-oriented investor interested in low-volatility stocks might therefore look for large-cap, dividend-paying stocks priced above $20 and trading at least 1 million shares a day.