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5 Keys To Portfolio Diversification

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by Gavin in Blog
June 30, 2020 0 comments

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When the market is performing well, it seems impossible to sell a stock for any amount less than the price you bought it at.

Despite this, it is always a good practice as an investor to diversify your portfolio in the event of any market fluctuations.

The common idiom, you should never put all your eggs in one basket perfectly reflects the philosophy of portfolio diversification.

Become A Disciplined Investor

The concept of diversification dates back to the creation of the first stock markets – it’s not a new concept.

Investing is an art and therefore the time to engage in portfolio diversification should be before it becomes a necessity.

A recent study published in the Wall St Journal found that once the average investor reacts to the market, over 75% of the ‘damage’ has been done.

This study is an ode to the paramount importance of diversifying your assets. Below are 5 tips to help you do this!

Share The Wealth

Do not under any circumstances put all of your investment funds into one stock or sector – it is the traders equivalent of suicide.

Rather, consider establishing your virtual mutual fund through investing in a handful of companies you are aware of, use in your daily life, and most importantly trust.

Stocks aren’t your only investment option; it is important to consider trading in other equities such as ETFs and commodities.

Think global when you trade in EFTs and commodities, share your risk around different markets and don’t back yourself into a corner.

Remember not to spread yourself and your portfolio too thin when it comes to this technique, there is no need to invest in 100 different stocks, commodities and EFTs as you will not have the resources to monitor them all.

Try to limit your portfolio to a more manageable number, 20-30 is a healthy suggestion.

Keep Strengthening Your Portfolio

Continue to increase your investments regularly. Refer to our article on dollar-cost-averaging to discover what we mean by this.

This strategy is used to mitigate your risk as an investor when it comes to the volatility of the market.

Dollar-cost averaging allows you to invest into stocks at a set period for a set amount of money.

If this strategy is utilised correctly, a trader will buy more shares when the prices are low, and fewer when the prices are higher.

Index Or Bond Funds

Adding index funds to your portfolio can be another way to ensure you are effectively diversified to mitigate any loss in value from stock specific risk.

By including a few fixed-income solutions, your portfolio is further hedged against the volatility of stocks.

Bond funds aim to match the performance of broad indexes, so instead of trading in an explicit sector, they try to follow the bond markets value.

When To Get Out?

It is important to know when to get out of an investment if it is causing your portfolio to dive into the red.

Dollar-cost averaging is a sound strategy and even though you have your investments on autopilot, it does not mean the market forces that are at play should be ignored.

Research your open positions, read the news and find out how the company is performing – that means get your hands dirty with everything there is to know about the company financially.

Reading the annual report and following the quarterly earnings announcement is always a good place to start.

If the company is not performing to your standards, then cut your losses and deploy the capital elsewhere.

Discipline is key to investing.

Check On Commissions

Some traders are old fashioned and have not read about all the fees that are incurred by using some trading platforms.

It may be the case that your firm charges a monthly fee and/or a fee for each transaction.

Whilst these fees may only be ‘small’, over time they can eat away at your bottom line and decrease the value of your portfolio.

Keep yourself updated on any policy or fee changes that your brokerage firm might implement and decide if staying with them is the best option for you.

The cheapest choice may not always be the best – a piece of advice to keep in mind when choosing a platform for your investing.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options Trading 101 - The Ultimate Beginners Guide To Options

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