Master the Art of Portfolio Diversification in 4 Easy Steps

Fsp Invest, 09 Dec. 2013

Tags: diversify your portfolio, diversifying your portfolio, portfolio diversification, why you need to diversify your portfolio



The worst mistake you can make as a new investor is not to diversify your portfolio properly.

You need to diversify your portfolio in order to spread risk around.

So it might seem tempting to put your life savings into that one hot stock tip, but in short, that is the worst thing you could possibly do.

Portfolio diversification is also important because you never know what the market is going to do next.

Let’s say for example you have a portfolio that consists entirely of equities…

What happens if the equities market takes a dive?

The moral of the story is: spread your share portfolio across multiple types of assets.

Here’s how to get started.

5 Tactics for diversifying your portfolio
 
If you’re looking to grow your wealth over the long term, you need to structure your portfolio accordingly. 
 
You can start out by following these easy steps. 
 
Tactic#1: Never, and we mean NEVER, stick to one stock
Making this mistake could be fatal for your portfolio. 
 
If you stick to one stock, all your money is at the mercy of one company.
 
The same applies to having stocks in one sector, for example mining. 
 
If you put all your wealth into the mining sector, you would have lost a lot of money when commodity prices took a dive. 
 
Multiple stocks, multiple industries. Stick to companies you know and trust. 
 
Tactic#2: Consider an index fund
An index fund tracks the performance of an underlying index. 
 
For example the Satrix 40 tracks the performance of the 40 largest companies on the JSE by market cap. 
 
Index funds are a great way to diversify your portfolio. 
 
Tactic#3: Add to your investments regularly
If you have R10,000 to invest, rather invest it in instalments. 
 
This way, you smooth out the peaks and valleys created by market volatility. 
 
You see, if you invest your R10,000 all at once, you are more exposed to a sharp price drop than if you’d invested little by little. 
 
This is the beauty of rand cost averaging
 
Tactic#4: Know when to get out 
Don’t buy and hold forever. 
 
If you notice a part of your portfolio is consistently underperforming, sell. Simple as that. 
 
By following these 4 easy tactics, you can start diversifying your portfolio today. 
 

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