Investing in the stock market: How to diversify your portfolio in five ways

Julie Brownlee, Fsp Invest, 16 Apr. 2014

Tags: investing in the stock market, diversification, how to diversify your portfolio, diversify, unit trusts, sector, etfs, location, company size,

When you invest in the stock market, diversifying your portfolio can help to reduce your risk. But how can you diversify your portfolio? There are a number of options open to you. Let’s take a look at some of them…

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#1: Diversify by company size

Your portfolio should include a spread across different sized companies. You don’t want to invest solely in small-caps for instance. Or solely in large companies for that matter. You want to get a nice spread of different companies.

Larger companies tend to be safer investment than smaller ones. But owning some shares in smaller companies will help increase your chances of seeing better capital gains as the share price is more likely to rise a lot more.

#2: Diversify by location

By holding investments in different countries you can remove some country-specific risk. Your portfolio will probably be South African investment heavy. But you could consider investing in some offshore markets via a unit trust or exchange traded fund.

#3: Diversify with unit trusts

Unit trusts are a great way to add instant diversification to your portfolio, the team of experts at The South African Investor explain. By buying into unit trusts you gain diversification that you would struggle to achieve yourself.

Unit trusts offer you the chance to invest in a spread of different equities, bonds and offshore markets.

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#4: Diversify by sector

You need to spread your investments across different sectors of the stock market. This removes sector-specific risk. By investing only in one sector and it plummets, your whole portfolio will plummet with it.

#5: Diversify with ETFs

Exchange traded funds or ETFs are a great way to add diversification. They act like unit trusts in many ways and give you exposure to different assets. And you can buy ETFs that concentrate in overseas markets too.

So there you have it, how to diversify your portfolio in five ways.

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