Investing Strategy – Diversification, Do You Need It?

Stock Market Investing Diversification Strategy

If you are to pursue a buy and hold strategy as previously mentioned, it may be beneficial to ensure that your portfolio is adequately diversified.  To diversify, you would likely want to use a mixture of the following investment vehicles.

  • Bonds – A debt security upon which the issuer owes the holder a debt and pay interest accordingly (the coupon)
  • Treasuries – debt issues by governments
  • Stocks
  • ETF / Mutual Funds – funds tracking industries or specific market segments
  • Real Estate – commercial real estate (offices or shopping centers)
  • Currencies – foreign exchange

You could, for example, choose 4 of the above options and split your portfolio among them 25% each.  Or, depending on your risk profile and your stage of life, you may want to go for the less risky bonds at 50% of your portfolio and use only 10% of your portfolio on stocks.

Advantages

Diversification can reduce the downside of any particular crisis.  If there is a recession, the bonds are a safe bet.  But if the economy hits a boom, then the best returns are from stocks.  With diversification, you can seek to hedge the downside whilst experiencing some of the upsides.

Disadvantages

If you diversify into investment vehicles, you do not understand you may suffer.

Too much diversification may mean your portfolio is hard to keep track of.

Average trade duration

Various – depends on the investment choice.

The effort to maintain the strategy

Medium to high – more diversification means more work

Risk Rating

Medium – even the best-diversified portfolios can lose money

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