The key to diversifying is to spread your money across different kinds of investments, called asset classes. Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment.
You should invest across industries. Even in the case of mutual funds, opt for an appropriate mix: large-cap, mid- and small-cap, multi-cap, etc. Within debt, you could spread your money between fixed income instruments and debt funds.
#2 Do you have variety, not just quantity?
Having a lot of investments does not make you diversified. To be diversified, you need to have lots of different kinds of investments but don’t over-diversify. For instance, if you have too many stocks in a portfolio, the more profitable investments will not create value for you.
Whether your stock portfolio includes six securities, 20 securities or more is a decision you have to make in consultation with your investment professional or based on your own research and judgment. If you diversify too much, you might not lose much, but you won’t gain much either.
It is important to keep adding investments on a standard regular basis and grow your portfolio. While diversification is crucial to building a stable portfolio, over time, your asset allocation will change, and so will your needs.
A critical step in managing investment risk is keeping track of whether or not your investments, both individually and as a group, are meeting reasonable expectations. Have a plan that includes an appropriate investment mix and regular re-balancing. Be prepared to make adjustments when the situation calls for it.
Just as it is important to put your money in a basket of investments, you must also spread it over time, this will help you smooth out peaks and valleys produced by volatile markets.
Though this is not directly associated with diversifying investments, at times you may be paying good amount of your equity as a commission. In case, you are not a trader, you should comprehend what you are receiving by paying fees to the firms for managing your portfolio. There are some firms that charges monthly fees while others charges transaction fees. One should be aware of the payments one is making and returns received.
Remember though, that no matter how diversified your portfolio is, risk can never be eliminated completely. Hence by investing in different categories of stocks you can reduce risk associated with individual stock/industry, but general market risks affect nearly every stock. The key is to find a medium between risk and return; this ensures that you achieve your financial goals while still getting a good night’s rest.
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