All About Diversification
2 min read
Diversification will consistently come up in your day-to-day and long-term investing. Because of that, newbie investors should familiarize themselves with the term.
What does diversification mean?
Diversification means to lower your investment risk with a variety of different investments in your portfolio. Doing so will enable you to limit exposure to volatility in specific stocks.
For example, say you have two stocks in your portfolio with equal weights. If one stock drops by 10% while other stock stays flat, the overall portfolio performance will only drop by 5%.
Diversification can occur through filters like geography, industry, market cap size, and more.
You can achieve a high degree of diversification with 15 stocks in your portfolio. Obviously, there is also trade off here: the more companies you have in your portfolio, the higher transaction cost.
Easy ways to diversify your investments
Modern-day investing is extremely accessible, considering available features like low-cost or zero commissions, fractional shares, and funds.
Funds, or collections of individual investments, can include index funds (aka funds that track a specified index) like mutual funds or exchange-traded funds ETFS).
ETFs trade on stock exchanges just like regular stocks, and investors can buy them throughout the day. Some EFTs are broad, like SPY (which tracks stocks on the S&P 500 index). Others are more thematic, like TAN, an ETF that tracks solar power companies.
Bottom line on diversification
You can easily diversify your investments by choosing securities in a variety of industries, asset classes, and even regions. As long as the securities react differently to different market events, that means that they are uncorrelated and diversified.
Raseed caters to people in the GCC region, and investing in the US stock market is the perfect example of how to achieve geographic and industry diversification. Sometimes, global events impact various international markets, but geography can often help incapsulate investments from market volatility elsewhere (like the GCC region). Staying on top of local and international financial news helps ensure you're aware of what's going on with your US stock market investments.
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