By Viram Shah

To begin with, it is important to understand that trading and investing are entirely different activities. While trading refers to buying and selling stocks for short-term profit, investing refers to buying and holding stocks for the long term. While specialized investors who are risk takers may indulge in trading, for retail investors looking to build wealth for the long term, investing is the way to go.

An Indian investor looking to diversify his portfolio geographically may look at investing a portion of their portfolio in US stocks. To build a portfolio of US stocks, one must follow the same strategy as one would to build a portfolio in any market.

Also Read: US Stock Market Investment from India: How to start, which funds to buy – All your questions answered

First, it is important to understand one’s risk appetite and investing goals, which means how much risk you are willing to take and what you want to achieve with your investment.

If you are in your thirties and looking to build a long-term corpus for your child’s foreign education 15 years later, you may be in a position to take more risks. If you are nearing retirement, capital preservation may be on the top of your mind. If you are looking to earn a regular income, you may want to invest in dividend-paying stocks.

The next step is to find companies you understand. If you do not understand a business or an industry, it may ot be right to buy the stock of such a company. While it may not be feasible to get a very deep understanding of a certain industry, it is important to do a fair amount of research before you make an investment decision.

Once you have zeroed down on a list of companies, you need to decide whether a certain company has a competitive advantage over the others. Big tech stocks like Apple, Amazon, Google, and Alphabet are popular among investors as they are market leaders in their respective sectors.

The final step would be to look at the price of a stock. Ideally, one would like to buy a stock when its price is at the bottom, but even the most experienced investor may not get it right. While there are many financial indicators to determine whether a stock is a good buy at a certain price, a lot of secondary research is available based on which one can make a decision. If you don’t have a good sense of what the right entry price is into a stock, dollar-cost averaging via recurring monthly/weekly investments is the best way to start. The key to dollar-cost averaging is to continue investing even when the markets are down. That way you get the advantage of low prices as well.

Also Read: Bed Bath & Beyond: The story behind the rise and crash of BBBY stock

Further, you also may not have the expertise to pick individual stocks. Exchange Traded Funds (ETFs) can be a good way for beginner investors to start investing in the US stock markets. It is possible to build an ETF-only portfolio. While ETFs are a basket of securities just like a mutual fund, unlike mutual funds, they are traded on the US stock exchange. Also, ETFs tend to have lower expense ratios than mutual funds as they are passively managed. For example, the Invesco QQQ ETF tracks the Nasdaq-100 index with an expense ratio of 0.20%. Hence, through it one can invest in the top 100 stocks of Nasdaq based on market cap by investing in a single ETF.

When choosing ETFs, one needs to determine the right asset allocation. Through ETFs, you can get exposure to an index such as Nasdaq-100 or S&P 500, large cap or small stocks, sectors, or themes. While index ETFs and large-cap ETFs are low-risk investment options, investors with a higher risk appetite may allocate a portion of their portfolio to small-cap ETFs. If you want to get exposure to themes like clean energy or electric cars, you may also do so through an ETF. By choosing the right ETFs you can create a portfolio to meet your long-term goals.

This year, while the YTD returns for S&P 500 is about – 11.28%, the historical annualized return over the last 5 years has been 12.74%. There may be ups and downs in the markets and in individual stocks and long-term investing is key.

(Author is Co-founder & CEO, Vested Finance)