Portfolio diversification is one of the most well-known subjects in the field of trading. However, it is also one of the most neglected ones, especially by new investors. Seasoned investors, nevertheless, keep their portfolios well balanced. They do it to a point that they even diversify their same asset investment across different markets around the world. Doing so minimizes associated risks while simultaneously improving the overall returns. So, if you are new to investing, here is why you should diversify your portfolio.
Why should you diversify your portfolio?
Well, to be concise, neither the market nor its different sectors react in the same way as the other. So, while you might be observing growth in a particular segment or the market at large, there might be some sector bucking the trend. An inverse scenario can also be true. For instance, consider the current market situation. The stock markets have observed a virtual bloodbath and lost around one-fourth of their respective positions in the last two months. The Pharma and Healthcare sectors, on the other hand, have registered a growth of a similar nature in the due course. The same somewhat holds true for the FMCG sector. So, as a wise investor, you must diversify your portfolio to minimize the losses when there is market headwind. It will also amplify your returns when the tide is in the favor.
How should you invest?
To begin with, establish a firm understanding in your mind that portfolio building is not a rocket science. However, it needs you to be aware about the applicable factors. The market is fairly simple to understand with different industries, verticals, and other relevant dynamics such as the regulatory framework, company’s management (including key shareholders), supply-demand dynamics, etc. working in conjunction with each other like clockwork. The more detailed your understanding is, the more accurate your assessment is going to be.
How should you diversify?
Your diversification completely depends on your personal investment strategy. Diversification can be done in terms of sectors, market capitalization (large-cap/mid-cap/small-cap), or the investment instrument altogether. A well-diversified portfolio is the one that has a good mix of securities (belonging to different sectors and company sizes), commodities (including bullion and base metals), and currencies. It also incorporates the respective regulatory outlook and different market scenarios. For instance, the coronavirus lockdown in India is now supposed to end on 3rd of May, 2020. However, as a good investor, you must always consider the alternate scenario and balance it out in your portfolio.
Establish targets and stop losses
Now, this might come as a no-brainer but do remember to establish respective targets and stop losses. It includes setting relevant parameters for your currency investments, if any. Also, maintain an extraordinary discipline with your targets and do not give in to emotional calls. This will help you go a long way with your investments.
Ultimately, diversification is completely your call to take based on your unique investment pattern, preferences, and risk appetite. Remember to never collect assets in a single sector or instrument since it exponentially increases your risk accumulation. Being an investor, the more insights you can gather around the market and your key stocks or assets, the better. Knowledge and insights are the true game-changers in the market, after all!
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