How to diversify the stock portfolio

Adsaff adsadsd By Adsaff adsadsd, 30th Dec 2010 | Follow this author | RSS Feed
Posted in Wikinut>Business>Investment

This is how I have diversified my stock portfolio to avoid a big loss if another financial crises or natural disasters should occur.

How to diversify the stock portfolio


There are many ways to diversify a portfolio. You can diversify by country, currency, sector, small companies, large corporations, dividends, not dividends, etc. ..

In theory, a new stock in the portfolio means you are one stock closer to achieving similar return as the stock-market indexes. More shares in the portfolio means lower risk and less chance for big profits.

Personally, I want to be diversified in different sectors, countries and currencies. So that let's say a crisis in the oil sector will not provide a big influence on my portfolio and dividends. It does not help much to be diversified in shipping, energy, finance and property if you only have German shares and the German money market dry up. This may do so the companies no longer get loans and in addition, higher interest rates. Then suddenly you run the risk that all companies cut dividends at the same time. Also if the dollar falls dramatically against other currencies, it sucks to only be exposed to dollar.

This is why I would like my portfolio to consist of 30-40 companies where no company stands for more then 5% of my portfolio. I also want to be exposed to Dollar and Euro. I will also diversify my stocks over different sectors and countries. So that a fall in oil prices might be negative for one of my stocks, but positive for another.

I will also diversify so that I have a security for total global financial crisis. Therefore, I expose myself to medicines, vitamins, and groceries like toothpaste, soap, milk and bread. Products you need regardless of financial crises and natural disasters.

Finally, I will also have a mix of companies that starts out with a low dividend but eventually will provide a higher dividend with companies that provide a high dividend from the start. Companies that provide a high dividend from the start is often in danger of cutting dividends during a recession or not increase dividends but only keep the same dividend year after year. Companies that provide low-dividends from the start are more likely to increase the dividend in both good times and bad. The reason for this is often that the companies with high dividends pay out all or a big part of their earnings as dividend, while companies with lower yields might only pay out half their earnings or less.

The most important thing for me is to not lose the income source dividends provide. With such diversification it is virtually impossible that all companies will completely stop paying dividends at the same time. It is more important for me to have a steady income all the time than a large income in upswings and no income in recessions.

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Comments

author avatar D in The Darling
30th Dec 2010 (#)

Oh, thanks for reminding us that putting one's eggs all in one basket isn't prudent at all. I was your student there for a moment. I don't care if I become for life. Keep them coming. I'm following you! Thanks for sharing!

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author avatar Adsaff adsadsd
30th Dec 2010 (#)

Thank you!

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author avatar Retired
15th Jan 2011 (#)

Good article,thanks.

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