Are you looking to make and save enough cash for your retirement in the near future? Do you have money idly waiting in your desk drawer? Do you feel that bank rates are just too low to get a significant return on investment per year? Why not try something that is riskier, and at the same time, will give you higher returns? I am not talking about simple stock market trading. What I am talking about is using the diversification strategy in stock market trading. It is not as complicated as you may think.
Before I start discussing the diversified strategy for stock trading, here’s a saying that I would like you guys to keep in mind.
“Don’t put all your eggs in one basket”.
This strategy entails investing in different kinds of stocks that do not move together perfectly in the fluctuations of the stock market. Thus, you get a diversified portfolio. When I say, “stocks that do not move together”, I mean that the stocks that you should be investing in are stocks that both are rise in price in economic booms and in recessions. These stocks should be in different sizes and from many different industries.
You would probably tell me,
So that would mean that, even in normal markets or economic booms, you should also invest in stocks that are relatively low during these times. Why? Are you crazy?
These stocks serve as a buffer so that when recession strikes, just like what happened a couple of months ago, you won’t lose everything. By having a diversified portfolio, you decrease the variability of your stock and thus reduce risk.
Two types of risk
There are actually two types of risk when it comes to trading in the stock market. The first one is the market risk and the second one is diversifiable risk.
1. The Market Risk is the risk that is common to all of the firms. Such risks are recessions, when cost of goods rise, etc. This is the kind of risk that cannot be diversified away even if you have diversified portfolios.
2. The Diversifiable Risk is the risk that is unique to every firm. These risks include labor strikes, bankruptcy, the manager running away with the company’s money etc. This kind of risk can be diversified away when one has a diversified portfolio.
Some Benefits of having Diversified Portfolio
1. Less Risk! That is the best benefit I could think of. The more stocks in your portfolio, the more risk that is diversified away.
2. Assures you that even with the fluctuation in the stock market prices, your portfolio is more secure than if you are only investing in one particular stock. You are given more assurance that you are not wasting your money or are not throwing it all away.
Before I start discussing the diversified strategy for stock trading, here’s a saying that I would like you guys to keep in mind.
“Don’t put all your eggs in one basket”.
This strategy entails investing in different kinds of stocks that do not move together perfectly in the fluctuations of the stock market. Thus, you get a diversified portfolio. When I say, “stocks that do not move together”, I mean that the stocks that you should be investing in are stocks that both are rise in price in economic booms and in recessions. These stocks should be in different sizes and from many different industries.
You would probably tell me,
So that would mean that, even in normal markets or economic booms, you should also invest in stocks that are relatively low during these times. Why? Are you crazy?
These stocks serve as a buffer so that when recession strikes, just like what happened a couple of months ago, you won’t lose everything. By having a diversified portfolio, you decrease the variability of your stock and thus reduce risk.
Two types of risk
There are actually two types of risk when it comes to trading in the stock market. The first one is the market risk and the second one is diversifiable risk.
1. The Market Risk is the risk that is common to all of the firms. Such risks are recessions, when cost of goods rise, etc. This is the kind of risk that cannot be diversified away even if you have diversified portfolios.
2. The Diversifiable Risk is the risk that is unique to every firm. These risks include labor strikes, bankruptcy, the manager running away with the company’s money etc. This kind of risk can be diversified away when one has a diversified portfolio.
Some Benefits of having Diversified Portfolio
1. Less Risk! That is the best benefit I could think of. The more stocks in your portfolio, the more risk that is diversified away.
2. Assures you that even with the fluctuation in the stock market prices, your portfolio is more secure than if you are only investing in one particular stock. You are given more assurance that you are not wasting your money or are not throwing it all away.
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