Easy Ways to Diversify Your Portfolio

we have all heard the phrase don't put all your eggs into one basket well this is especially true when it comes to your portfolio the thought of putting all your money into common shares of one or two companies that could double is very attractive however let's be honest this is more like a casino than sound investment decision making owning only common shares of two companies means that if they both perform horribly you will lose a lot of money what is the solution your portfolio should be more diversified diversification is a vital concept that sadly might not be understood by everyone hi my name is alex nashville and today i will simplify the concept of diversification and explain a few ways to diversify your portfolio [Music] simply put diversification means that your eggs are invested in more than two companies just in case one of them falls down and breaks as soon as you enter the stock market you face two main issues that could break your eggs the market risk and the stock specific risk we have a very recent example of market risk if we look at what happened in 2020. looking at the u.s market more specifically at the s p 500 which is used to represent how well the stocks are doing in the u.s we can see a sharp drop in march 2020. that is the market risk no matter how good the stocks in your portfolio were their market prices took a hit but then the stock specific risk comes in some companies will greatly underperform the stock market or will simply go broke the more companies you have the smaller the impact of one going broke will have on your portfolio let me illustrate what i mean if we chart the risk of your portfolio based on the number of stocks in it we have the market risk no matter how many stocks you hold market risk will always be present then on top of that you have the stock specific risk mathematical models show that a portfolio of 20 to 30 companies is diversified as you can see holding more names does improve the diversification but if you pay for every transaction like you would with a broker this might become costly if you are over diversified then among the stocks held it is common to introduce the concept of geographical diversification this is done either by buying companies outside of your country or by holding a fund in addition to your 30 stocks that fund could apply an investment strategy on a larger number of companies and would be designed for those other geographical regions the last simple way to diversify is the diversification by asset class just like my colleague chris mentioned in his video about asset allocation by holding a portion of cash in your portfolio you are diversified in a way because that portion will not go down if the market takes a dive while giving you an opportunity to buy companies at a discount if it does happen you can also hold fixed income securities such as bonds contrary to popular belief bond prices can fluctuate a lot during a market correction however since this is a debt that a company agreed to repay to you along with the interest payments the risk is different than for common shares because bonds have a higher priority in case of bankruptcy it is considered as less risky to conclude i greatly simplified the concept of diversification but you should now have a better understanding of what it means thanks for watching for more investment tips visit our website at clara.ca or get in touch by clicking on the links in the description and don't forget to click on the like and subscribe buttons below [Music] [Music] [Music] you

Channel: Claret Asset Management

Views: 4,191

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Id: 8cawGO7f6lE

Length: 3min 58sec (238 seconds)

Published: Tue Sep 28 2021