5 Steps to Diversify a Stock Market Portfolio
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If you've ever watched Wolf of Wall Street or any other finance movie, you know that investing in stocks can be incredibly lucrative. However, diverse investments can help you meet your financial goals, mitigating against market loss.
In this article, we will go over some of the best ways to diversify your stock portfolio—so you can choose the investment mix that works best for you.
1. Diversify using impact investing or similar investment strategy
Review your goals (such as retirement), your time frame, and your risk tolerance when determining a portfolio mix. Once you have that down, you can consider investment strategies such as impact investing.
Impact investing seeks to generate financial growth while making a positive social or environmental impact. For example, you might choose a fund that offers Halal investing. One example is the Amana mutual fund (AMAGX) from Saturna Capital.
2. Make sure your stock portfolio has various investment vehicles
Investment products include stocks, mutual funds, exchange-traded funds (ETFs), target date funds, bonds, and more. A Sukuk is a halal alternative to bonds, where an issuer sells a certificate and uses the funds to buy an asset that the buyer now has partial ownership in.
Other instruments you should consider are commodity-focused funds (oil, gas, gold), short-term investments (such as CDs and money market funds), and real estate funds.
3. Diversify by sector
In the stock market, sector means a collection of industries. Pull stocks from different industry groups (like tech, healthcare, or energy) to protect you from concentrated volatility within sectors.
For example, the US tech sector saw immense volatility in early 2021 due to inflation. Meanwhile, the real estate sector boomed.
Stock portfolio sector diversification also helps you save on trading fees and offset trading costs.
4. Diversify by different market caps
A company's market capitalization is its overall stock market value (number of shares X current share price value).
Small cap: $300 million – $2 billion
Mid cap: $2 billion – $10 billion
Large cap: $10 billion+
Decide on a mix of capitalizations, which will give the portfolio the growth and stability it needs. Small-cap stocks tend to be more volatile than larger ones, which brings risk but also potential for returns.. Mid- and large-cap stocks are more stable, which can benefit your portfolio growth.
5. Choose investments with different risk levels
Select investments of different risks, so any substantial gains offset losses from other investments.
For example, you might purchase international stocks to add diverse risk to your domestic portfolio. Or you may purchase shares from a newly public company while balancing with a blue-chip stock that's shown growth for decades.
Diversification helps your reach your financial goals
Diversifying your holdings is good for beginner investors and veterans alike. It encourages financial growth while balancing risk, making your money work for you. Plus, diversification can be exciting because it allows you to test out new stocks as you rebalance your portfolio over time.
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