If you’re working on a portfolio then the biggest weapon you have in your armoury is your salary or wage. It comes in on a regular basis and you can use it to buy more stocks, or put it into your savings account. You can also hit up Golden Eagle Coins to add another few bars or coins.
Your second-biggest weapon is a good diversification strategy.
What is diversification?
In order to have a good diversification strategy you need to understand what it actually is. You don’t diversify just so that your portfolio looks more colourful and exciting, you do it to manage your risk. A well-diversified portfolio has many different classes of assets in it – futures, stocks, mutuals and metals. This sort of portfolio will, over time, offer better returns and lower risks than the individual elements in it; a clear case of the whole being greater than the sum of its parts.
Why you really need to diversify
Too many people don’t make the effort to diversify even though they know it’s a good thing in principle. You need to break down the reasons further.
You’ll lower your risks
If you put all your investments into one company and then it goes to the wall or its flagship product is no longer in vogue, then you could have your investment wiped out in a matter of days.
If, however, you spread out your money between ten different companies, all in different industries or sectors, then even if one product is found to cause male pattern baldness, the other nine companies will buoy your portfolio up. If one of your other investments is in cures for baldness, then you might end up making more than you hoped for! Similarly, you don’t just diversify your on-paper stocks, you bring in some physical assets just in case the entire stock market gets a drubbing.
You also need to use different investment styles
You can’t just use one sort of investment strategy either. You need to look at both value and growth. The value is the basic strength of the company and its management. You need to see if the stock price is realistic and sustainable according to estimates of its real-world worth.
Then you look at growth, as in how much the company is likely to grow in terms of developments, new products and so on and how this growth will increase the value.
Then, you bring in a combination of growth and value investments to reap the benefits of both.
You get the benefits of overseas markets
Many people only ever invest in what’s familiar to them – they stick to their country, sector, industry or to old companies that have sentimental value to them. It’s great to support your local industries, of course, but you shouldn’t limit yourself as there’s lots of other opportunities out there.
By moving out of your comfort zone you can learn about other markets and industries, as well as other countries. This means that you’re not left floundering if your “old faithfuls” take a dive.
You’ll be protecting your investment
Now you see how diversifying helps to protect you against market dips and other adverse events, you’ll want to do it. Make sure you don’t just stick a pin in the stocks listings, though! Do your homework and take some advice before you buy anything.