Once a strategy has been defined, it is now time to learn how to pick stocks or ETFs that align with that strategy. For more detail on stock picking, read our full guide on how to pick stocks.
With investing, every trade taken is a compromise because that money could be invested elsewhere. Therefore, typically, investors opt for only selecting the best candidates according to their strategy.
While there is not one single best stock or ETF for everyone, there is for each strategy. Take a growth investor, for example. If there are at least 10 stocks at a given time, which are forecasted to grow earnings by 50% per year over the next five years, then there is little reason to buy a stock with only 5% growth. If an investor wanted more than 10 stocks to buy, they choose the next strongest and then next.
Similarly, with a value strategy, an investor may look for stocks that are stable or growing but that are trading at a low valuation based on discounted cash flows or P/E. They opt for the best stocks that combine these factors.
Technical traders may look for breakouts in the strongest stocks, or fundamental traders may look for companies in the best financial position (strong cash position, low debt, high cash flow and so on).
For passive investors, their only job is to select a few funds that match their long-term goals. For most, this will be diversified index funds, typically tracking the S&P 500, FTSE 100, Nasdaq 100, or popular indexes from other countries. More niche exposure can be gained by purchasing an ETF in the desired sector.
With this step, also consider asset allocation – this is how many stocks or ETFs are to be held in the account and how much capital is allocated to each one.
One common way that an investor might find new individual stocks to invest in, is by using a stock screener to filter for companies that match the parameters of their chosen strategy.