Diversification strategy isn’t a phrase that should scare you, even if you are a new investor, because it doesn’t have to be complicated. After all, it’s really a simple way of saying, “Don’t put all your investment eggs into one basket.” Simple, right? Truly, it is.
In fact, you’re better at this than you might think. All you likely need are some guidelines to help you get started… and stay on track. So, let’s do this… together.
Diversification – No One’s Perfect
You’re going to be wrong! I hope that doesn’t catch you off guard, but as an investor in the stock market, one of the most important things you can, no must, accept is that you will be wrong. Your investment portfolio will get struck with things you never imagined and all your careful research never could foresee. Whether it’s a “Tech Bubble” or a “European Crisis” or a “Black Tuesday” or something less catastrophic like the sudden death of a visionary CEO or a bursting of a pipeline below the ocean, something will go wrong… and it will impact your portfolio.
Often sound advice turns out to be totally wrong. Sometimes things turn out in such a way that only a fool would predict. Which is why fools, too, have their place in analysis and debate.” In recent months, some might say the past year, investors across the globe have struggled to be right as much as they were wrong leaving some to give up, or stay away from, investing in the stock markets. But with a diversification strategy, you can afford to be wrong. One thing I refuse to do is “predict” the stock markets… instead, I prepare for them to ebb and flow. Diversification is really preparing your portfolio to make money in any market condition, even declining stock markets. After all, no one’s perfect… or we’d be able to buy that one stock at the exact right time and sell it at it’s absolute top each and every time, or any time for that matter!
Diversify, NOT Dilute Your Portfolio
Diversification has been the mantra of the mutual fund industry and passive investor for years. And rightfully so. The simple benefit of not risking all you have within one security is quite simply wise. Yet what is good for your portfolio can loose some of its intrinsic benefit if taken too far.
For example, there’s nothing I enjoy more than a glass of pure, non-concentrate, orange juice (unless it’s a jug of the same). In fact, it’s one of the few things in life I’ll pay a premium for. Now, let’s say you offer me a cold glass of pure orange juice, perhaps from hand-picked and freshly squeezed oranges out of your Florida tree (now I’m living in a dream). I accept, with great delight… and watch as you pour me half a glass. Chincy? Perhaps… but not as bad as then watching you put that half glass of pure orange juice under the tap and top it up with water. C’mon… even bottled water won’t do!
“Diversify, NOT dilute your investment portfolio” Sure, I get it… I now have a full glass of orange juice, pure in fact. But watered down to the point it loses it’s real value and taste! Diversifying beyond a reasonable amount by simply choosing a mutual fund with 100 stocks in it or an index fund which mirrors the 500 stocks within its index is taking a concept beyond its useful, and tasteful, conclusion. It dilutes the good and the bad… making them almost indistinguishable.
Develop a Diversification Strategy
Diversification is all about risk management. At the heart of the discussion is how can investors ensure they spread out the risk of their investments in order that they don’t ever get caught off-guard by one investment when they are wrong… and we already established, we’re all wrong sometimes. No sector (i.e. technology, oil and gas, food, etc), no one stock, or any other single entity should make up your whole investment portfolio. Inherent in the word “portfolio” is the concept of holding more than one item. So, even if you’re only starting out, you can still be diversified by holding a single stock as well as cash in your investment portfolio.
In the next few articles, we’ll walk together as slowly as you need, toward a diversified portfolio. So, feel free to email me questions, leave comments below, and if you enjoyed this introduction, please Tweet it or give it a thumbs up too! I appreciate your support. Then come back in a couple of days and we’ll lay out some guidelines that will help you, or even a new investor, develop your own diversification strategy.