Six dos and don’ts of diversifying your stocks portfolio
Putting all your eggs in one basket is generally not a good idea when investing. By investing your money into different places (AKA ‘diversifying’), you can spread out the risk.
When it comes to trading stocks, this involves holding a variety of stocks in your portfolio. This ensures that if the value of one stock plummets overnight without warning, you won’t have lost all the money, because you’ll still have money invested into other stocks. In this article we share six dos and don’ts to help you diversify your portfolio.
1) Do invest in at least five different stocks
In order to spread the risk adequately, you need to invest in at least five different stocks. Some experts will recommend much more than this – a minimum of ten or even twenty stocks. However, five really is the bare minimum, providing each stock makes up 20% of your portfolio.
2) Don’t invest in too many stocks
It’s possible to invest in too many stocks to the point that you cannot keep track of them all. It can also affect any large gains you may get from individual stocks. A selection of 20 to 30 stocks is generally considered the sweet spot. Anything more than this is not recommended unless you’re investing a huge amount of money and have the time to regularly track each stock.
3) Do invest in different stock market sectors
An entire sector can be affected by a single event. Just look at Covid-19, which caused all companies within the entertainment and travel sectors to lose a significant amount of income, resulting in companies across the board losing value. Holding stocks in different sectors can prevent you losing all your money if an entire industry collapses. An example could include some tech stocks (like Apple and Microsoft), some energy stocks (like Chevron and BP), some healthcare stocks (like UnitedHealth Group and Pfizer) and some consumer staples (like Walmart and Coca Cola).
4) Don’t invest in companies or sectors you don’t know
It’s important to do your stock market research before investing in companies or sectors you are unfamiliar with. Investing in something you don’t understand is essentially gambling. The most successful investors choose companies they know and love. Of course, if you only have knowledge of one sector, you may want to branch out and educate yourself on other sectors. But generally speaking most people will have a good knowledge of a variety of companies (for example, most of us know Apple, McDonalds, Netflix and UPS – and they’re all from different sectors).
5) Don’t allow a single stock to make up more than 20% of your portfolio
You can invest more money into one stock than others if you think it’s going to be a higher earner. However, you should try not to invest any more than 20% of your portfolio into a single stock. This prevents you from losing too much money if one of your stocks experiences a sudden dramatic loss in value.
6) Do consider investing in other places beyond stocks
The entire stock market can experience corrections and crashes, which means putting all your money into stocks is never a wise idea. It’s worth keeping some savings in more stable places such as bonds and savings accounts. You can also try investing money into other places like real estate, gold, crypto or forex. Just make sure to only ever invest in things you understand.