Stock Portfolio Diversification

Diversification is one of the key components of a successful investment portfolio. Almost all experts advise the avoidance of concentrating all of your investments in one type.

However, many investors forget about diversification once they see a financially attractive stock and concentrate all of their assets in it. Other investors make a similar mistake and being influenced by their emotions fail to listen to their common sense whispering "Diversify".

Many companies have attracted their employees to investing in company stock as part of their retirement plan through the provided matching of contributions. As a result most investors end up concentrating their assets in company stock and forgetting about the importance of diversification.

Investing in your company's stock is not something bad. However, you should own not only your company's stock, because if something bad happens with your company you risk not only losing your job but all of your assets.

Through diversifying your stocks among different industries you decrease to a great extent the risk of losing your money.

You should be cautious when selecting your stocks because you may have chosen different stocks and still have not achieved diversification. For example, you may select stocks of companies that are highly related to one another and as a result a change in one of the industries may affect the rest of them. In such a case it is said that the companies have a high degree of correlation.

Therefore, you should select companies not only from different industries, but also companies that are influenced by different economic influences. An example of a diversified portfolio would be stocks from aerospace manufacturer, food producer and a computer producer. As a result a change in the food industry will no affect the computer industry.

Aside from selecting companies from different industries, you can also diversify among small, mid and large cap stocks. You can also mix your portfolio with growth and value investments as well as foreign stocks. No matter what type of stocks you will select you should remember to include stocks that are not subject to the same market and economic factors.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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