Ever heard the term, “Don’t put all of your eggs in one basket?”
Well, that’s really all you need to know about diversification. But I will dig into it a bit more just because I’m sure you’re here to learn a bit more than that one sentence!
Diversification is simply an integral part of any portfolio. Why?
So what can you do to mitigate those risks? One being single stock risk, and the second being asset class concentration.
There is really only one way to diversify away the risk of owning a single stock… and that to own multiple stocks! Now, how you do that will vary from investor to investor. But one way is to start investing in companies that operate in different industries, are of a different size, and even in a different country.
So for example, if all of your eggs are in Apple stock, you are not diversifying very much by buying Microsoft stock as well. Thats because they are both:
The way to diversify away your risk would be to buy something different. Maybe a European consumer staple company like Nestle, or potentially an Asian manufacturer like Toyota.
By holding equity in companies from different geographic locations and different sectors, you will protect yourself from isolated shocks that occur within industries.
One major asset class that most people expose themselves to is real estate. And they do it on borrowed money, with no positive cashflow. That is, they buy a single family home that they live in and pay a mortgage on.
For many, this real estate investment (their home) is their only investment. That would be characterized as poor diversification. By just adding exposure to stocks, even just one stock, they are broadening their investment pool and moving their eggs out of just that one basket that is their house.
Now, there is an easy way to do this without taking time to research and pick individual stocks: ETFs.
ETFs offer investors a gateway to both wide diversification among equities (you can buy ETFs with exposure to the entire stock market) as well as asset classes (you can buy gold ETFs, Real Estate ETFs, Chinese Equity ETFs, the list goes on and on!)
Some great ETFs to keep on your short list when investing and diversifying your portfolio are:
One thing to note before purchasing ETFs is that they are not all created equal. Check out our guide on the risks of investing in them here
I hope that this article was helpful in showing you that diversification is not only important but relatively easy to achieve nowadays with the advent of ETFs that come in a host of different flavors!
Please stay safe and feel free to reach out to us if you have any investing and trading related questions.
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