One of the key themes in investing is diversification. In this video, Alex discusses why it’s important to have a diversified portfolio, and explains how you can diversify your own portfolio.
McVean Wealth – How to Diversify Your Portfolio
One of the key themes in investing is diversification. Diversification is the act or practice of spreading investments among a variety of securities or classes of securities.
The reason we want to diversify our portfolio is so we can generate enough return to meet your goals, while taking on the least amount of risk. When you put all of your money in one company, you have a chance at making a lot of money; but you also accept the risk of losing a lot of money. Wise investors know that by putting all of your eggs in one basket, you are taking on too much risk.
How do you diversify?
The first step to diversifying your investments is to determine your asset allocation. Your asset allocation is how you spread your investments amongst the various classes of securities. The main classes of securities are stocks, bonds and cash. When distributing amongst asset classes, consider the amount of time you have before you need to use your money, your comfort level with risk and your current financial situation.
Once you have determined an appropriate mix of assets, you will need to select specific securities within the classes of assets. Here is what you’ll be looking for in a diversified portfolio:
Securities that have low or negative correlation; so when one companies value is going down, another companies value is going up
Securities from different countries
Securities from different industries
Securities of different sizes
While diversification will not eliminate risk entirely, it will help you lower the amount of risk in your portfolio.
For McVean Wealth, I’m Alex McVean