Many times, people are scared of putting their money into the stock market. This is largely because they do not understand the basics of effective risk management and are afraid to lose all their money in one swoop.
The question is: are you one of those people?
Not to worry, we were all there at one point or the other.
At this point, you most likely have heard about diversification. And, it was probably explained to you with all the financial jargon you can possibly think of. However, in this article, we plan to break it down in simpler terms.
Diversification refers to the process of assigning your money or initial capital investment to a number of stocks across different industries. In other words, instead of buying $1000 worth of Apple, you most likely want to buy $250 of Apple, $250 of Samsung in the phone production industry $250 worth of Tesla in the automobile industry; $250 worth of AirBNB; etc.
By doing this, you are spreading your risks across different sectors, instead of depending solely on one company or sector for your portfolio growth. This way, diversification helps you reduce your risk exposure.
What then are the steps to diversifying your portfolio?
- Ensure your portfolio has investments from different companies.
If you have read up to this point, you are probably confused about which stock in what industry to buy. An alternate method to beat this problem is to purchase ETFs. ETFs are a basket of different stocks, and this gives you the instant diversification which we all crave.
Still want to learn more about ETFs and how to pick them?
Listen to our webinar on Building a 20 Year Portfolio.
- Buy stocks which are growing at different rates.
Let’s say you do not want to buy ETFs, and want to focus on handpicking your stocks yourself, the best way to do so is to hand pick different stocks which are growing at different rates. How would you know this information? You can check the stock history across the last 90 days, 180 days, etc. That way, you can make a more informed decision.
Note that you can find this information on your Trove App or Web platform.
All Assets > Foreign Stocks > Toggle the Chart to your desired number of days/months
- Buy stocks across different industries.
A great example for this was the market volatility during the coronavirus period in 2020. Certain industries heavily downsized, like the airliners, which invariably made their stock prices fall like the wall of Jericho. Now imagine if a person placed all their investments in just the airline industry, while ignoring other industries… What do you think would have happened to their investments? Investment exposure to different industries gives your portfolio an invaluable well-rounded balance.