You’ve probably heard that investing in multiple stocks protects your stock portfolio. And, we’ll not deny it, cause that notion is true.
Diversifying your stock portfolio comes with a wide range of financial benefits. For one, it helps keep your portfolio from being too liquid and volatile. This can prevent a permanent loss of capital.
Furthermore, the variety of asset classes can perform differently in the face of dynamic market conditions. If you need to liquidate immediately but have only one stock in the red, this translates to a loss.
However, having multiple stocks increases the chance of you having at least one winning stock, allowing a guilt-free withdrawal due to your investment’s inherent profitability.
While the benefits are clear, the process of diversifying may be a headscratcher to those who haven’t done it yet. It’s not as simple as picking different stocks blankly in the exchange and calling it a day.
Want to ensure that you’re diversifying your stock portfolio the right way? Read on for some actionable tips on diversifying your portfolio.
First off, let’s define this popular stock investment term.
Diversification is when you intentionally invest in a broad mix of assets, usually stocks and fixed-income investments. This process can help your portfolio retain its value whenever a stock is in a freefall.
Diversification can also exist within just the stock market. The stock market contains shares of stock from several industries. This includes energy, technology, banking, retail, mining, healthcare, utilities, etc.
While you don’t need to have a holding in each of them, having a couple of stocks across these industries can be an excellent way to diversify your stock portfolio.
Besides scattering your capital across different industries, you can also diversify through different lenses.
For instance, you can diversify based on the stock's geographic location. You can also consider diversifying based on your preferred investment style, with some stocks being growth-focused while others being more value-focused.
There are countless other categories you can apply to facilitate your stock diversification process. For instance, you can diversify based on asset class, market capitalisation, and sector.
Diversifying across these categories can help safeguard your finances in case one stock rapidly declines. This, in turn, helps keep your capital growing with time.
Here are some ways you can diversify your stock portfolio.
The growth of a winning stock can be exceptional, but it can also be a gamble. And it’s entirely possible for you to lose that gamble—leading to devastating losses.
To prevent this financial risk, consider investing in different commodities that specialise in doing the diversifying work for you—ETFs, in other words.
Exchange-traded funds are a collection of stocks and securities that track or aim to outperform their geographic market index. They can be bought and sold just like stocks in most licensed stock exchanges. The S&P 500 and the ASX 200 are prime examples of ETFs.
These index funds are great as they typically track only value stocks, leading to consistent and tighter price movements. This can help ward off any sudden, sharp chart dips, giving you time to react with an entry or exit when necessary.
For newbie investors, ETFs offer a solid investment option since it’s an inherently diversified asset. You don’t have to individually keep up with multiple investments; you can keep this running passively as is.
Simply owning multiple shares of stocks is not going to be enough for long-term financial growth.
If you want to grow your money over time, you’ll have to consistently allocate a portion of your income to your stock investments, regardless of its current price—a process known as dollar-cost averaging.
This strategy can lead to a lower average cost per share over time, potentially increasing your returns. Furthermore, regular contributions help you uphold discipline in following through with your financial goals, which can be beneficial for your long-term financial well-being overall.
Owning a diversified set of stocks is one thing, but if you fail to capitalise on it, then it's as good as a loose brick—useless.
As such, it's important that you plan out each aspect of the exit
A tip to help you out is to automate your income so that a portion of it goes into a bank account that you can draw money from to fund your investments. The specifics of how much you’re willing to allocate is up to you.
You can request your employer or banking provider to allow this process. This helps you maintain discipline and keeps you on track with your investment goals.
If you’re completely new to stock market investing, it’s good to start investing a tad bit conservatively at the start. This way, any mistake you may make won’t lead to big losses.
One moderate-risk strategy that employs diversification is the 60/40 balanced portfolio — traditionally split between 60% of equity-trade funds or stocks and 40% of treasury bonds.
This investment method helps ensure that your money has a chance to grow YOY, while still maintaining a good “safety net” with the guaranteed returns from the bonds.
While this figure can be a good rule of thumb for beginners, the ratio can change depending on your circumstances, experience, and age.
If, for instance, you’re older, you can decrease the stock allocation and increase your bond allocation instead. Conversely, if you’re younger and are willing to take up risk, you can diversify a tad more to your stocks.
But as a rule of thumb, the 60/40 rule is helpful, especially for novice investors looking to be in the market for 2-4 decades more.
Don’t just neglect your stock portfolio right after you’re done making the first commitment. The world of stocks and business is inherently volatile, and this can mean that some holdings you have now may not have that great of a future later on.
Conversely, some stocks that you may have overlooked or not yet uncovered could be worth investing in the future.
If you find yourself resonating in either situation, then you must strike the opportunity as soon as you can. This entails rebalancing your portfolio to reflect and capitalise on current market conditions.
Rebalancing your portfolio means selling underperforming stocks or buying the ones that you think have potential. Of course, this entails knowing the financial viability of these stocks, like PDN share’s performance.
The act of rebalancing your portfolio is inherently diversifying your stocks since you’re buying shares from a different company and exploring different opportunities.
That said, if your investments are still healthy, you don’t need to buy every “high-potential” stock out there. But by rebalancing your portfolio, you can grow your stock portfolio and truly capitalise on the ebb and flow of the market.
The NYSE and the ASX aren’t the only places that have stocks listed in them.
Countries and regions from around the world also have their own stock exchange database—each with companies that have varying levels of success.
Investing in global markets is a great way to capitalise on businesses that are not from your home turf. This helps you in times of geopolitical tensions since businesses can fumble when their host country is going through tough times.
Having said that, be sure to have investments in countries different from your own. This way, you can protect yourself in the event that your country’s global political standing isn’t doing so well.
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