Don’t put all your stocks in one basket.
Minimize exposure to risk by buying a variety of stocks. Whenever a loss happens – and they do happen – the damage will be minimal. You’ll recover with your other investments.
If you don’t diversify your stocks, you could experience a devastating blow. Remember the dotcom crash? Some investors only had tech stock.
They lost big time.
You can avoid the same fate by purchasing a variety of stock. Consider these 4 types of stock when diversifying your portfolio.
1. Diversify Stock by Size
When it comes to size, companies are generally categorized into 3 tiers:
• Small-cap companies are worth less than $2 billion.
• Mid-cap companies are worth between $2 billion and $10 billion.
• Large-cap companies are worth more than $10 billion.
Keep in mind that the cost of a stock doesn’t indicate the overall wealth of the company.
A stock can cost $25, but the company could be worth billions. Conversely, a stock can cost $50, but the company could be worth half a billion. Most experts agree that large-cap stocks are safer to invest in. Typically, large-cap companies are dominant and established brands. They’re stable and survive recessions. Mid-cap companies are riskier to invest in. However, they offer more growth-potential than large-cap. Small-cap companies are even riskier to invest in. And they offer even more growth-potential than mid-cap.
If you have a stable income from large-cap stocks, you can risk small-cap investments. If the small-cap company grows tremendously, you can make a fortune.
2. Diversify Stock by Style
Stocks can be categorized as ‘growth’ or ‘value.’
Growth stocks belong to a company that is growing quickly, or at the least is expected to grow rapidly. Value stocks are sort of like stocks on sale. The market does not value these stocks, for whatever reason. However, the company is just as good as its peers.
Keep your eye out for value stocks. They could be a good investment.
3. Diversify Stock by Industry
It’s very important to diversify your stocks by industry.
When a significant event damages a company, it typically damages the entire industry. For example, if there’s a massive drought, every food company will suffer. Imagine you owned stock in a variety of companies, but they were all food companies.
Nasdaq sorts stock by industry. Here are 11 of their categories:
• Basic Industries
• Capital Goods
• Consumer Durables
• Consumer Non-Durables
• Public Utilities
• Consumer Services
4. Diversify Stock by Location
Diversifying stocks based on geographic location is a good idea as well.
Areas can experience localized recessions. Venezuela are two modern examples of this. If a portfolio only had stock in Venezuelan companies, chances are it crashed and burned. Historically speaking, the U.S. has been the most business-friendly nation on the planet. If you want to make good money on stocks, you’re going to buy American stocks. However, there’s a lot of potential with international stock. As the global economy becomes more interconnected, markets are emerging everywhere.
Be on the lookout for distant markets that are poised for expansion.
Routinely Rebalance Your Portfolio
The value of stocks changes over time. The risks and potential of stocks change over time. Therefore it’s important to periodically rebalance your portfolio.
A lot of experts recommend adjusting your asset mix when any part moves 10% from your target balance. Let’s say stock A gives you $10,000 a year and stock B gives you $500 a year. There’s a good chance you need to re-diversify your stock portfolio.
Does your stock portfolio need diversified? If you started a portfolio, how would diversify your stocks? Leave a comment. We’d love to hear your thoughts!