How To Diversify Your Stock Portfolio

How To Diversify Your Stock Portfolio

It is important that you spread the stocks in your portfolio and diversify it so that you are saved from the unsystematic risks. The best way to do so is to select two to three stocks from different sectors to form your portfolio. When you do this then your capital getting affected by any unsystematic risks gets reduced a lot.

Unsystematic risks are taken care of when you diversify your portfolio

Suppose you invest in company A for your full capital amount. Then this means that you are exposed to the unsystematic risks. However, you could limit the risk by buying company A with half of your capital and company B with the other half of your capital. This way you spread out your risks and in case of any unsystematic risk, the damage gets spread.

Thus if something was to happen to company A, you still have your investments in company B to give returns. Themorenumberof stocks that form your portfolio, the more is the diversification and the less is the unsystematic risk.

How many stocks should be there in your portfolio?

The next question that arises in the investor’s mind is how many stocks should ideally be in someone’s portfolio. This could be based on your individual choice because it depends on how many stocks are you actually able to manage at a single time. Around 15 is the ideal number of stocks that you should diversify into.

The unsystematic risk drastically reduces when you add more stocks to your portfolio and diversify the risks. However, it is important to take care that diversification in excess is also not good. It is important that you stay invested in not more than 15 kinds of stocks because it will not only help to spread the risk but also make it easy for you to manage your portfolio. The number of stocks does not mean that you will be able to diversify more. In fact, after a certain amount of time, the graph becomes almost flat.

Conclusion

Diversification is an important part of your investment. You should not only diversify into different asset classes but also diversify within the asset class as well. This will help you to spread your risks. Here you can learn more about it and create a structured and balanced investment portfolio.

Diversification is an important part of the investment and it is only through diversification that you can spread out your risks.