stock portfolio Investment
How Should I Diversify My Stock Portfolio?
07 December, 2021
Investors are often asked to never put all their money in a single market. This is the first and most important rule of portfolio diversification. If you are a new investor who is looking to diversify your portfolio, then you may want to read this blog thoroughly before making a move.
What Is Diversification?
Portfolio diversification is the act of allocating your resources optimally in various securities and in the most strategic way possible. It is a management strategy that is created by an individual or fund manager in order to involve multiple investments in a single portfolio.
It includes combining stocks from various industries, companies, countries, risk profiles and even across various financial products like bonds, debentures, derivatives, commodities, real estate etc.
Why Is Portfolio Diversification Important?
The whole idea of portfolio diversification exists to help an investor float in volatile markets by lowering risks. It also helps an investor yield higher benefits through better returns.
Think of it this way:
If your equity shares don’t perform well, then you can cover up that risk through your investments in gold bonds.
This form of diversification can help you reduce risk and increase profitability.
Tips To Diversify Stock Portfolio
Consider Other Choices
It’s best to consider different options before diversifying your portfolio. A lot of investors make the mistake of investing in just blue-chip companies without thinking further. Although they reap decent benefits, relying on them solely is dangerous for your portfolio. But if you still wish to diversify in equity only, then you need to invest in various sectors like health, energy etc.
Buy at least 7-8 stocks that belong to different industries to deviate risk.
Get Some Stability
Equity shares are high-risk, high-profit investments, they can be risk-driven. Investing only in shares could be harmful to your growth. To create a balance in your portfolio, it’s best to bifurcate your money and invest in bonds or similar investments that provide a stable income like Treasury bills, Certificate of Deposits, Commercial Papers etc.
If you are confused about how much you should allocate your assets in bonds and shares then a good way to go about it would be to minus your current age from 100. For example, a 25-year-old can allocate 75% of his money in shares and the rest 25% in fixed income bonds. This proportionates your assets in a decent way. However, if you are facing any kind of financial crisis then it’s best to consider the situation before opting for this method.
Investments are a long-term commitment. Therefore, it's crucial to understand how much money you are earning on your cost. If an investment is not performing well, then spending money on it like autopilot won’t be beneficial. It’s best to sell such investments and move on to better options. Never stop growing your portfolio.
Diversification is the safety net of your financial growth. It can help you stabilize your income and reap benefits.
A diverse portfolio will increase your financial value and help you leverage your investments further by availing a loan on your portfolio. LAS or loan against shares and securities is a financial product that can help you get a loan at the value of your stock portfolio. You can enjoy extra funds while you grow and diversify your investments.
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