Best Types of Stocks to Buy for Different Investing Profiles

Although the economy is in a downspin and unemployment is at frightening recent historical highs, the stock market has been relatively resilient and the Dow Jones Industrial Average has managed to keep above 10,000. Certain companies have continued to prosper, while others have been hit hard, so research is still important to conduct when one decides to buy stocks. However, not all investors have the same targets, risk – reward tolerances, and investment requirements. Here are some general investor profiles and suggestions for the best stocks to add to a portfolio to meet those needs, based upon historical sector performance:

For the younger investor who has a job and has yet to reach their top earning potential, growth oriented stocks, in the long run, will give them the maximum benefit. For the most part, a younger investor can maintain a larger risk – reward ratio, since they can afford some losses in search of larger gains without putting their (as of yet unborn) kids’ futures in jeopardy and won’t have to worry yet about a mortgage. An aggressive portfolio consisting of tech, homeland security, biotech, energy and emerging markets (like Chinese and Brazilian companies), for example, might be suitable. For very aggressive investing, the younger investor might consider penny stocks, which often have limited liquidity, but can yield triple digit returns if there is enough momentum and the timing is right, although the downside risk is commensurately higher as well.

For the investor that is negative on US and European prospects, due to the huge debt problems faced by those countries, he or she may seek the returns available from the emerging markets, such as China, Brazil, India, and others. While it is possible to buy stocks in foreign companies on foreign exchanges, it can be cumbersome for the novice investor due to foreign exchange issues and other obstacles. An easier method is to purchase ADRs (American Depository Receipts) of foreign companies that trade on US exchanges at a fixed ratio to their respective markets of origin. Famous companies like Baidu (China), Royal Dutch Shell (Netherlands), and Royal Bank of Scotland (UK) are just a few ADRs that are easily traded in the US. Alternatively, if an investor likes a region but no specific companies in particular, there are ETFs (Exchange Traded Funds) which can be identified for most areas. ETFs function in similar ways to mutual funds, but trade like stocks on an exchange, rather than having to buy or redeem a mutual fund based on its NAV (Net Asset Value) for the day.

Investors of a more conservative bent may prefer less volatility and longer track records for consistent growth. Many Fortune 500 companies in major industries, such as food processing and services, pharmaceuticals, retail, transportation, defence, software, and others would fit this category. The best stocks in terms of performance within each industrial sector are usually consistent over a 3 to 5 year period, and those statistics are easily available in many publications and online. If investors are overly concerned about inflation and wish to hedge themselves by investing in other currencies or prefer precious metals, oil, and other commodities over any particular companies, there are ETF’s available in the US market to satisfy those goals.

Investors that may be retired or are living on a fixed income have different needs than the above cited profiles. Preservation of capital and steady income streams are of primary importance to these investors. If they do not want to hold onto bonds and prefer the liquidity of the equity markets, preferred stocks can often be the best stocks for this purpose. Preferred stocks trade like common stocks but have coupons that pay an annual yield like bonds, giving an investor the best of both worlds.