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Stock Diversification Tips

Diversification alleviates the risk in your portfolio and improves its performance. However, it is worth noting that there is not just one way of diversification.

One way to diversify your stock portfolio is to purchase many types of stocks. One of the biggest mistakes that most investors commit is to invest just in the stocks of the company in which they work.

Many people consider the purchase of their company's stocks as a sign for their loyalty. They also consider it a good deal that can be transferred to their retirement plans. However, many times it has been proven that it may not be in your best interest to put your money just in your company's stocks.

The key to successful diversification is the inclusion of stocks coming from different industries and companies of different sizes (e.g. large-, medium- and small-sized).

It is worth noting that when selecting stocks you should be careful not to choose stocks that are influenced by one and the same economic factors. So, diversify among large, small and medium companies that are part of different industries.

Stocks that are influenced by different economic factors will move in different directions regarding the changes in these factors. However, if for instance all of your stocks are influenced by the interest rate, a change in the latter will lead to the same response by all of your stocks, which in some cases may not be of your benefit.

The key is not to be attracted by the so called "hot" sectors and move all your stocks to that sector, because the conditions may at any point turn against you and since you have put all your eggs in one basket you may end up with no money.

For further diversification you should not concentrate all of your assets just in stocks. Include other asset classes, such as bonds, mutual funds and etc. in order to achieve a greater level of risk protection.

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