Why Do Investors Need To Diversify Their Portfolio?

There are no angels on Wall Street and there are even fewer sure things. Remember that no matter how much research you put into an investment, there's always a risk you'll lose your money. 

You can lessen the risk by investing in great companies that have proven track records, like those in our showroom. Bedrock companies like Apple or Google are very unlikely to go bankrupt anytime soon, but it's still a good idea to cover yourself against all possibilities. 

This is where diversifying comes in. This means spreading your investment over a range of companies and sectors. After all, why put all your eggs in one basket when there are so many great companies to invest in. 

Spreading yourself too thin will lead to average returns. You should aim to own around 12 different companies within your first year of investing. 

The Power Of A Diversified Portfolio

Here are a few ways you can easily diversify your portfolio:

Market Cap

You can diversify by investing in companies of various sizes. Investing in bigger companies comes with less risk, but also with less potential for growth. Smaller companies are riskier but provide greater potential for big returns. A smart investor looks for balance. Cover the risk of investing in small cap companies by diversifying with bigger, safer, investments. 

Sectors

Don't over rely on one sector. If all your investments are in oil companies and the price of oil drops, your whole portfolio is going to take a hit. Different sectors respond differently to economic conditions. A drop in the price of oil will hurt oil companies but will benefit FedEx and airlines. So spread your investment over varying sectors to ensure a major economic trend or geopolitical event can't hurt your entire portfolio. 

Geography

Economies are in a constant state of flux. When the economy is down, consumer spending is down. You can protect yourself by investing in companies that have exposure to foreign markets. Coca-Cola is an American company that makes most of its money overseas. A struggling US economy is going to hurt Coca-Cola's earnings, but not as much as it will hurt Chipotle, who operate primarily in the States. 

The Importance Of Geographic Diversification

Asset Classes

As well as stocks, you can spread your risk by investing in things like real estate or bonds. We believe that younger investors should look to stocks as their main source of investment, simply because they provide the greatest returns. As you get older, you may want to invest in less risky government bonds to ensure your portfolio is protected and you have a steady income stream.

If you want to start investing, MyWallSt's got you covered with a shortlist of market-beating stocks, so you too can accumulate long-term wealth. Simply click here for free access today.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.