Why Diversification Is Important in Investing

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As an investor you are constantly being barraged by a veritable word salad by brokers trying to get you to buy their stock, and one of the biggest thrown about is diversification. Here, we give you a heads up on what it means and how diversifying your portfolio can impact your investments.

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What is Diversification?

Having a diverse portfolio of stocks and shares basically means that you aren’t holding all your eggs in one basket. Sometimes professionals advise that you have stocks in competing areas within the same field, for example if a repeat of the Boston Tea Party was ever to happen, having stocks in coffee and other beverage providers would be useful. A smarter way of diversifying is to ensure that all of the stocks you invest in have no bearing whatsoever on each other. If you have three stocks in your portfolio, having one in a videogame company, one in an office supply company, and one in an agriculture company would be a way of creating a highly diverse portfolio.

Day Trading

Day trading is a very popular strategy for investors who are looking for financial freedom (you can work from home or make a lot of money trading while you travel the world) but what is it and how does it work? Day trading is a strategy that involves the buying and selling of a financial instrument within the same market day. Day trading really makes the most out of being able to take into account news cycles in different climates because if you hear of something that will impact a stock in Tokyo but the market isn’t open yet, you can see how Japanese products fare in other markets. While you analyze the impact an event has during the day trading in New York, you can be prepared to make an action for when the Tokyo exchange opens a few hours after closing.

Location is Key

Remember that there are exchanges all over, with the market leaders being in New York, London and Tokyo. As a result, a news event that is affecting a type of market based in Europe, for example, may not necessarily impact a stock of the same market in Asia or New York. Have a look and see where the companies, and the exchanges that trade in their stocks, are based. There are also different types of assets that can further help with this as bonds react differently to stocks, for example.

How Many Stocks Should I Hold?

While having your fingers in as many pies as possible is often seen as an advantage, the problem is that if you diversify too much, it can lead to some unintended consequences. The best approach is to keep your portfolio to 15-20 companies and keep an eye on the platforms you are using to trade, because some of them have very little transactional fees but have huge fees should you cash out within a certain time period. While the point of diversification is to mitigate risk, there is no point in opening yourself up to more risk by being sloppy about whom you do business with.

 

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