Steps To Strengthening Your Stock Portfolio And Why You Should Diversify

We all know diversification is typically a good thing, but you rarely see anyone talk about the why behind it. What is the impact of it? How about we start here.

Diversification is defined as the spreading of your investments both among and within different asset classes. This means not only holding different stocks for example, but holding different assets. The benefit is simple. If one of your investments declines, it should not wipe you out.

Diversifying is not a guarantee to never see losses, but it should help for a smoother ride throughout your investing journey. For example, if you owned Apple and Pfizer stock, one could be positive and the other could be negative at any point in time.The declines should balance each other out by owning multiple stocks across multiple sectors.

The 11 Sectors And More To Consider

Across the stock market there are 11 different sectors: energy, materials, industrials, utilities, healthcare, financials, consumer discretionary, consumer staples, information technology, communication services, and real estate. Additionally, you could invest in bonds, commodities, cryptocurrencies or even collectibles like art and fine wine.

Not only are different sectors and types of investments important but the geography of where companies are located is important. 

What country has had the best performing stock market since 1900? Yep. You guessed it. Australia! Not the United States. The point is, none of us have a crystal ball nor do we know what companies based where will perform best. One country could have a recession while another is in expansion.

One Stock Isn’t Enough

Getting exposure to a sector through one stock isn’t enough. For example, if you needed technology exposure in your portfolio, only holding Apple would put you at more risk than necessary. You could hypothetically add a company like Microsoft so you aren’t concentrated. Better yet, the easiest way to get exposure would be buying an ETF like XLK which would give you exposure to over 60 technology companies. Every sector has ETFs that will give you exposure to them if you do not feel comfortable picking individual stocks. None of these are recommendations to buy, but examples of what could be done.

The Real Impact Of Diversification

Before you uncover the impact of diversification, you need to answer a question. Why are you putting money away at all? I doubt it’s only to build a big account to stare at every day. I’d guess it’s to eventually use that money in the future by potentially turning it into an income stream.

When it’s time to sell out of some of your investments and draw from your account over time, you’ll want to sell positions near their peak.Think “buy low, sell high.” Though it could be impossible to do this, you want to avoid selling positions that have had significant declines. Diversifying across sectors, asset classes, and geographical areas could help do this. For example, say you own XLK, a Technology ETF, and XLH, a Healthcare ETF. It comes time to hypothetically sell some of your investment portfolio but XLK has declined significantly while XLH has been modestly positive over the past year. You could sell XLH instead of locking in a loss on XLK. This would give you the income you need and decrease the risk of hurting your portfolio.

Achieving Diversification

Talking on the benefits and actually becoming diversified are 2 majorly different things. So let’s sum this up.

Consider identifying sectors of the stock market you wish to be invested in. 

Consider multiple companies or ETFs from those sectors. 

Consider different asset classes.

Consider different countries.

If you do not feel comfortable doing this on your own, consider consulting a financial professional to assist you in attaining a diversified portfolio.

Disclaimer

This article is intended to provide general information and does not constitute financial advice. Everyone's financial circumstances are unique. It's crucial to consult with a certified financial planner or a trusted financial professional who understands your specific situation before making decisions based on this information.

Armando Sallavanti is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC (www.sipc.org). Supervisory Office: 2 Bala Plaza, Ste 901, Bala Cynwyd, PA 19004. Tel: 610.766.3000.

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