Your investment portfolio needs to be protected and if you’re an investor like me whose in it for the long run. One thing we will and probably have experienced is a market crash. In March 2020, Covid-19 happened which led to a lot of stocks crashing in value. I don’t believe that a stock market crash is necessarily a bad thing but it is important to protect your assets.
The term putting all your eggs into one basket applies here. Not diversifying and relying on only one sector will lose you money. In this post, I’ll go through 5 ways I’ve used to diversify my investment portfolio and how you can too. I’ll also talk about the mistakes some make when trying to diversify so you can avoid them.
How I diversified my investment portfolio
When I started investing, as well as not knowing what to buy, I wasn’t aware that I should diversify my portfolio. That was until I fell into the red because my chosen sector wasn’t doing very well. I decided that I would take steps to make sure that I stay in green. After all, green is my favourite colour.
It was then I promptly took the following five steps:
Invest in more than one market
It’s easy to invest in only the marketplace you live in. For me, it was the London Stock Exchange since I live in the UK. I would have probably done the same if I was living in the US. I felt this way it would be easier for me to manage my stock portfolio. However, I quickly realised that this wasn’t the best because I limited my stock portfolio’s growth potential.
Therefore I started investing in the US market too and I plan to invest in other markets in the future such as Europe. This has the following advantages:
- You might not always be affected by changes in other markets or changes in government policy elsewhere because the economic conditions of that other country may be different to where you are. For example, if you’re in the US and you’ve got a portfolio bringing you significant returns then you may be affected by Joe Biden’s new capital gains tax but this doesn’t affect investors outside of the US. I can still keep buying shares in US-based companies.
- You will have the added advantage of being in a different time zone which means that the markets open at different times. Covid-19 caused the whole world to shut down causing a market crash everywhere but being in a different time zone gave the benefit of not being affected immediately. If something like this happens again, there’s no need to panic because you may have time to think about what you do next; sell, hold or buy!
- Currency diversification is amazing! If the value of the GBP appreciates then this can help increase my returns because you may end up paying less in fees and buying shares at lower rates.
Broaden the number of industries you invest in
When I started investing, I only bought shares in technology company’s or if like many others you started investing in March 2020 when Covid-19 caused the markets to crash and you invested in health care companies thinking they’ll come to the rescue with a vaccine and rake in the profits, then you may have experienced a lot of days in the red.
Investing only on one or two different industries is not a good idea because when one industry isn’t performing well, then the value of your entire portfolio can fall. However if you invest in many other industries then you’re protecting yourself as when one industry falls the others in your portfolio will help to balance out your losses as they may be increasing.
Strength in numbers – buy in more companies
It’s important to buy many different stocks from companies across a wide range of industries but its also necessary to have a good amount of companies. I’d recommend having approximately 25-30 companies which you can invest your money into over the next 25-30 years.
I currently have approximately 14 company’s in my portfolio so I’m working my way 25-30. I usually select the industries I’m interested in and then buy a few companies from within those industries even if they are competitors. For example I have both AT&T and Verizon who are direct competitors with each other. I’ve done this to protect myself so that if one is down the other tends to usually either remain stable or increase in value.
Complimentary Reading: Buying Stocks: How To Pick The Right Ones For You
ETF’s are automatically diverse portfolios
I’ve become a big fan of ETF’s because they are a wide range of carefully selected companies within your portfolio. They take away the countless hours of research you have to for every single company but that doesn’t me you don’t do any research.
I’ve invested in the Vanguard S&P 500 on my trading platform, Trading212 also known by its ticker symbol VUSA. It has over 500 companies within its portfolio and those are spread out over a number of different industries including technology, healthcare, finance, utilities, real estate and many more.
Don’t just buy the same size companies
Companies like Microsoft, Apple, Johnson & Johnson are great to have in your portfolio because they are large companies with a stable future. They also pay a dividend which is great if you’re a dividend investor like me.
However, I would recommend buying companies of different sizes too because when the market is goes through a change and the larger companies share price goes down in value, the smaller or small-to-medium size companies aren’t impacted as much.
This way you can also manage your risk as well as have companies in your portfolio with a range of different profiles.
What you can do to ensure a well diverse portfolio
Commit to the long term
I’ve mentioned Warren Buffet in a few of my posts recently but the man has been investing for over 50 years and is living proof that investment is not a short term game, It’s for the long term and he’s living proof that this method works. I’ll share some more of his words of wisdom with you:
If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.Warren Buffet
The above is a statement I completely agree with. Progress takes time and as the other saying goes, Rome wasn’t built in a day. Investing now is not for your current self but for your future self so work hard now so you can enjoy the fruits later.
Avoid this mistake
Over-diversification is real
You might be thinking that having 100 companies in your portfolio is better than having 20 because then your portfolio will be more diverse. You’re both right and wrong but in my humble opinion more wrong.
You are right because the more companies you have in your portfolio, the more you are spreading your risk and spreading your risk is a good thing especially if you have a low-risk tolerance BUT this is the wrong approach because you will be limiting your growth and you may end up paying more fees.
Your money will go further if instead of putting little into many companies, you put more into a smaller group of companies. For example ten shares of Apple will bring you a greater return than having just two shares. And if you’re a dividend investor like me, then you’ll earn more in dividends from having more shares of a company which you can then reinvest and grow your wealth.
I would recommend having between 25-30 companies. Some may argue that even 30 is too much but it all depends on your risk tolerance. I believe it is better to spread your investments across a wide range of companies from multiple industries to get the best return.
Diversification of your portfolio is something every investor needs to do. In my humble opinion, it is the best way to protect your assets from a crash and also the best way to grow your wealth. I’ll leave you with the following two key things:
- Don’t over do it. Having too many companies in your portfolio can reduce your changes of growing your wealth. Remember that you want to grow your wealth by a lot, not by a little.
- Results won’t appear over night and maybe not even after your first few months. Good things take time so make sure you stay in the game for the long term since its for your future, not for your now.
I’d recommend picking upto 25-30 companies in your portfolio in combination with ETF’s and then spend the next 25-30 years growing your investments in those companies by investing a little at a time.
Hopefully you liked what I had to share. If so, pay it forward by sharing it with others.