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Make your Stock Portfolio Safer with Proper Diversification

Buying more then a handful of stocks can really help your stock portfolio survive a market correction, recession, or everyday volatility. Diversification spreads risk over multiple securities allowing added protection if one stocks tanks or a whole sector tanks.

Let’s look at a definition of Diversification:
Diversification – Allocating your portfolio with many investment securities that are as unrelated as possible, and using a relatively equal weighting on each security.

Diversification deals with the payoff between risk and reward. Owning one great tech company can provide a big payoff, but what if they miss numbers or their new hot product is a flop. By owning many stocks, a drop in this tech company won’t devastate your investment portfolio as much. Diversification provides investors with the ability to lower their portfolio risk through many investments. However, Keep in mind that the more diversified you are, the more your investment portfolio returns will match industry averages such as the S&P 500.

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Posted on August 13, 2007 8:10 PM | Digg | del.icio.us

Comments (5)

Julie:

I don't have a lot of money invested, am I ok with only 5 stocks? I have two retail stocks, one energy stock, one tech, and one industrial.

Posted by Julie | August 14, 2007 2:37 PM


Market Flavor:

Your diversification isn't bad. It can be difficult to property diversify your portfolio with a smaller amount of money. We recommend that you look into some ETF's to help balance out your portfolio. Check out the SPY which is designed to mimic the S&P 500. This provides your portfolio with exposure to a lot of stocks without breaking the bank. Also look into sector specific ETF's such as the XLE for energy.

Posted by Market Flavor | August 14, 2007 3:52 PM


Anonymous:

Don't forget about diversifying with Real Estate, Bonds, and Foreign Investments.

Posted by Anonymous | August 15, 2007 7:31 PM


Anonymous:

I understand how this helps when one stock in your portfolio drops a lot, but it still sucks when the the whole market is also losing.

Posted by Anonymous | August 15, 2007 11:00 PM


Micheal AL:

Diversification won't help in a down market like we've been having. Everybody loses unless you are short the market. the risk level of your investments determines if you lose more then the market or less.

Posted by Micheal AL | August 16, 2007 11:04 PM


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