If you’ve only been investing in the technology sector and all of your stocks have gone up in value, why bother branching out? It’s not a good idea to put all your eggs in one basket, because your industry or asset of choice could sharply decrease in value in the wake of a new political movement, an industry strike or shutdown or patent expiration. If your portfolio is looking a little lopsided, use these tips to help increase your portfolio diversification.
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Why is Diversification Important?
When you invest all of your money into a single stock or industry, you sharply increase your risk of losing money. When you put your money into multiple types of industry investments, you protect yourself in a bear market and can help improve your chance of return in a bull market.
You should also diversify your portfolio by investing in a variety of asset classes through a mix of stocks and bonds. Stocks are more volatile and offer more potential for both risk and reward.
A good rule for determining your ideal asset mix is to subtract your age from 120 and use this as the percentage of your portfolio that should encompass stocks. For example, a 25-year-old (who can withstand a large amount of risk) should have a portfolio makeup of 95% stocks and 5% bonds. On the other hand, a 55-year-old man or woman who is nearly retired should have a portfolio that consists of 65% stocks.
What Factors Influence Your Level of Diversification?
As a general rule, younger investors can afford to take on much more risk with their portfolios. In the event that the market takes an unexpected turn and your investments lose a large amount of value, younger investors still have time to reconfigure their portfolios.
Older investors approaching retirement will want a wider range of diversification to limit their risks.
2. Risk tolerance
What are your investing goals? If you’re saving for retirement, you’ll want to take fewer risks with your money. However, if you’re saving for something smaller and more casual (like a down payment on a car or a home), you can afford to take on more risk and can get away with a lower level of diversification.
3. Your relationship status
If you’re married, your financial movements are a joint decision. You’ll need to consider the age and risk tolerance of your spouse as well. If you support children or elderly parents, you’ll also want to be more conservative and maintain a higher level of diversification.
Tips for Diversifying Your Portfolio
Tip 1: Think outside your industry of choice
If you work within the industry in which you’ve invested, it can be easy to get swept up in investing in names that you know. Think outside the box and consider investing in corporations whose products you use in your everyday life.
Berkshire Hathaway leader Warren Buffett once famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Chances are that there are a number of wonderful companies whose products you return to again and again.
Watch Warren Buffett explain diversification below.
Tip 2: Consider investing in index funds
If you know you need a more diverse stock portfolio but don’t want to go through the hassle of picking and choosing individual stocks, invest in an index fund to manage risk. An index fund is a pre-packaged bundle of stocks sold as a single unit.
Index funds usually track a large segment of the market as a whole; many of the most popular index funds attempt to mimic the performance of the S&P 500, an index that tracks the 500 most profitable corporations in the United States. Index funds are liquid, tax-efficient and offer novice investors a quick way to create a more diverse portfolio.
Interested in funds that track the indices? Check out Benzinga’s list of the best index funds and start trading with some of our favorite brokers below.
Tip 3: Get educated on market movers
Learn more about the biggest companies outside of your industry. Get familiar with what’s going on in other segments of the market to better identify stocks worth your investment. Make a pact to spend at least ten minutes reading news from outside of your industry each morning or subscribe to an investing advice mailing list that delivers market news to your inbox. You may learn about market movers you never knew existed.
Benzinga offers a number of daily and weekly email newsletters to help you make smarter financial decisions—for free! Sign up now on our homepage.
Tip 4: Check out a few sample portfolios built by experts
Investing isn’t a test, so there’s nothing wrong with doing a little copying! Follow the recommendations of experienced money managers, financial advisors, and active traders to get a “cheat sheet” of profitable investing opportunities. You can also view a few sample portfolios from sources like NPR or MarketWatch for more investing inspiration.
Diversifying your portfolio is one of the best steps you can take to protect yourself from loss. In a market that’s always changing, staying up to date on market news will help you make more informed decisions with your money.
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