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Diversified Portfolio Stocks – The More The Merrier

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Introduction

 

As the great Warren Buffet once said….

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

 

This is a very important aspect that is crucial to how you invest moving forward. It is viewed as a law in the world of investing and is commonly used by the novice and elite alike. In this lesson, I am going to show you why this fundamental law will lay the foundation to your investing future – along with the ways you can create a collection of diversified portfolio stocks when it comes time to make your first stock purchase as an investor.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Diversifying Portfolio Stocks

 

 

Diversification is a risk management technique that you can apply to your stock portfolio.

By diversifying your stock portfolio, you may increase your chances of achieving higher returns without taking on extra risks.

Diversification is investing in multiple stocks within a portfolio to help reduce the risk of a large loss from any single stock position. Additionally, diversification might provide steady or potential returns because when some stocks are falling, others might be rising.

Stocks have had higher historical returns than other asset classes, such as bonds, commodities, and real estate. These historically high returns are why diversifying some of your portfolio into stocks can be important.

But there is a trade-off. With the potential for higher returns comes higher risk.

 

 

 

As an asset class, stocks can lose 50% or more in value. The risk is even higher with an individual stock which can lose all its value, dropping to zero if the company goes bankrupt. However, diversifying among stocks can minimize the risk of large losses, while still reaping the potential rewards.

There are several ways to diversify your stocks personally up. In this lesson, we will be focusing on market capitalization, industry groups, and international stocks.

Market Capitalization

 

 

Market Capitalization or the Market Cap, is the company’s dollar value, and ranges from small, mid, and large-cap.

Like the label implies, small-cap stocks are smaller and younger companies. Because these stocks have the most growth potential, they typically offer the highest risk and reward.

Mid-Cap stocks are more established and carry less risk – but still have high reward potentially.

Large Cap stocks are big, well-established companies that carry on less risk than mid caps, but still offer solid potential returns, and some pay dividends.

 

 

Industry Sectors

 

 

In addition to the market cap, you can diversify your portfolio across industry groups that have different risk and reward profiles.

Some industries such as financials and technology are the leading prone to higher growth, but are more sensitive to market fluctuations. Other industries such as utilities and healthcare, are prone to lower growth but are less sensitive to market fluctuations.

Because industry groups can perform differently depending on the economic climate, investing in multiple groups is another way to diversify your portfolio.

International Markets

 

 

The last way we will look at diversifying your stocks portfolio is with international stocks. Just like industries, stocks from around the world perform differently depending on the economic climate.

International stocks are divided into three markets: frontier, emerging, and developed.

Frontier markets are the smallest and least developed. These stocks offer the highest risk and reward potential. Examples of frontier markets includes Bulgaria and Vietnam.

Emerging markets are less risky than frontier markets – but still offer high potential for reward. Examples of emerging markets includes Brazil and China.

Developed markets are less risky than emerging markets, but can still deliver rewards. Examples of developed markets includes the UK and Japan.

Quite often other markets move higher while the US market is moving lower. Diversifying with international stocks can help offset losses in a bearish US market.

Taking The First Steps

 

So how can you build a diversified stocks portfolio? The first step is to determine your risk tolerance and time horizon. These factors determine how much to allocate to stocks.

Generally investors with a higher risk tolerance and longer time horizon might allocate more to stocks, and those with a lower risk tolerance and shorter time horizon may allocate less.

After deciding how much of your portfolio to allocate to stocks, the next step is finding stocks to invest in. You
can start with a stock screener, which searches stocks by market cap, industry, or international markets.

The next step is deciding which stocks to buy and when. Fundamental analysis can help you decide what to buy and technical analysis can help you decide when to buy.

Fundamental analysis includes checking sales earnings and cash flow figures to evaluate the company’s performance.

After identifying strong companies, you can use technical analysis to determine when to buy stocks. This includes analyzing trends, price patterns, and support and resistance levels.

As buy signals appear, always be looking for opportunities to diversify. Try to look for stocks across different market caps, industries, and countries.

To start, you might consider large-cap US stocks first because they are relatively lower risk and tend to follow the broader market. After large caps, you might branch out to mid and small-caps, while spreading risk across different industries.

After mixing a mix of small, mid, and large cap US stocks across various industries, you might round out the portfolio by buying international stocks.

Finally, try to be selective and avoid investing your entire portfolio all at once. Investing all at once exposes your portfolio to market risk. You can minimize the risk of buying at the wrong time by staging your purchases over several weeks or months.

After building a diversified portfolio, its important to frequently review and manage your stocks. This might include occasionally taking small losses and replacing losing stocks with new ones. But keep diversification in mind when adding new stocks to an existing portfolio.

Diversifying your portfolio by investing in various market caps, industry groups, and international stocks is one way to help reduce the overall risk among stocks, while still maximizing potential rewards.

 

 

Quick Recap

In Review……

Diversification

  • Diversification is a risk management technique that you can apply to your stock portfolio
  • By diversifying your stock portfolio, you may increase your chances of achieving higher returns without taking on extra risks
  • Diversification is investing in multiple stocks within a portfolio to help reduce the risk of a large loss from any single stock position. Additionally, diversification might provide steady or potential returns because when some stocks are falling, others might be rising
  • Stocks have had higher historical returns than other asset classes, such as bonds, commodities, and real estate. These historically high returns are why diversifying some of your portfolio into stocks can be important.

Investors Diversify Using These Three Methods……

 

 

  1. Market Capitalization
  • Market Capitalization or the Market Cap, is the company’s dollar value, and ranges from small, mid, and large-cap
  • Small-cap stocks are smaller and younger companies. Because these stocks have the most growth potential, they typically offer the highest risk and reward
  • Mid-Cap stocks are more established and carry less risk – but still have high reward potentially
  • Large Cap stocks are big, well-established companies that carry on less risk than mid caps, but still offer solid potential returns, and some pay dividends

 

2. Industry Sectors

  • In addition to the market cap, you can diversify your portfolio across industry groups that have different risk and reward profiles
  • Some industries such as financials and technology are the leading prone to higher growth, but are more sensitive to market fluctuations. Other industries such as utilities and healthcare, are prone to lower growth but are less sensitive to market fluctuations
  • Because industry groups can perform differently depending on the economic climate, investing in multiple groups is another way to diversify your portfolio.

 

3. International Markets

  • The last way we will look at diversifying your stocks portfolio is with international stocks. Just like industries, stocks from around the world perform differently depending on the economic climate
  • International stocks are divided into three markets: frontier, emerging, and developed
  • Frontier markets are the smallest and least developed. These stocks offer the highest risk and reward potential. Examples of frontier markets includes Bulgaria and Vietnam
  • Emerging markets are less risky than frontier markets – but still offer high potential for reward. Examples of emerging markets includes Brazil and China
  • Developed markets are less risky than emerging markets, but can still deliver rewards. Examples of developed markets includes the UK and Japan
  • Quite often other markets move higher while the US market is moving lower. Diversifying with international stocks can help offset losses in a bearish US market
  • So how can you build a diversified stocks portfolio? The first step is to determine your risk tolerance and time horizon. These factors determine how much to allocate to stocks
  • After deciding how much of your portfolio to allocate to stocks, the next step is finding stocks to invest in. You can start with a stock screener, which searches stocks by market cap, industry, or international markets
  • The next step is deciding which stocks to buy and when. Fundamental analysis can help you decide what to buy and technical analysis can help you decide when to buy. Fundamental analysis includes checking sales earnings and cash flow figures to evaluate the company’s performance
  • After identifying strong companies, you can use technical analysis to determine when to buy stocks. This includes analyzing trends, price patterns, and support and resistance levels
  • Try to be selective and avoid investing your entire portfolio all at once. Investing all at once exposes your portfolio to market risk. You can minimize the risk of buying at the wrong time by staging your purchases over several weeks or months
  • After building a diversified portfolio, its important to frequently review and manage your stocks. This might include occasionally taking small losses and replacing losing stocks with new ones. But keep diversification in mind when adding new stocks to an existing portfolio
  • Diversifying your portfolio by investing in various market caps, industry groups, and international stocks is one way to help reduce the overall risk among stocks, while still maximizing potential rewards

 

 

And that is really all you need to know in terms of stock portfolio diversification. Investors aim to incorporate a little bit of everything in their portfolio – with market caps, industry sectors, and international markets in mind before they invest any capital.

So will also need to create an investing plan of how to watch out for stocks to buy. There are many resources that you could use at your disposal such as stock screeners, financial statements used for fundamental analysis, and analyzing stock charts for technical analysis.

Diversification is key – and is considered one of the many golden rules when it comes to the world of investing, as it will help you offset risks against market backlash.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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