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Diversify Your Portfolio

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Diversify Your Portfolio

When it comes to managing your investment portfolio it is important to diversify. Many investors sabotage their portfolio by picking industry winners or picking the next “Apple” and investing all their money in a stock or industry. In other words, these investors put all their eggs in one basket. This is an example of why many investors fail to keep a consistent and growing portfolio. Here are some tips to help you stay diversified:

(Note: The companies I mention are for example purposes only)

1.) Spread Your Wealth: Don’t put all of your money in one stock or industry. Diversify by creating your own virtual mutual fund. That means spread your money into companies that you understand, trust, and perhaps use in your daily life. For example, after doing intensive research, you may find that you want to put 25% of your money in Shoppers Drug Mart, 25% in Apple, 25% in Wal-Mart, and another 25% in Tim Horton’s. By doing this you are diversifying by having your money in the retail industry, medicine industry, food industry, and technology industry. Therefore you are limiting your risk and increasing your chance of creating a more successful portfolio.

2.) Consider Index or Bond Funds: Don’t limit yourself to only equities. Take a look at adding index or fixed income funds to your portfolio. Investing in these funds can help create a steady long-term diversification for your portfolio. By adding fixed-income, you are hedging your portfolio against market volatility and uncertainty.     

3.) Stay Consistent: After creating your portfolio, make sure you are following your “game plans” and adding consistent cash to your portfolio. If you want your portfolio to grow you can use a technique called, “Dollar-Cost Averaging”. This technique states that you buy fixed dollar amount of a particular investment on a regular basis. You buy more shares when the price is low and less shares when the price is high. However, if your not the type of person to trade on a daily basis, and you like to invest for long term. You can use the same plan by setting out a target date or target price to buy and sell for the long term.

4.) Know When to Diversify: It is important to follow the news and know what is happening on an economic scale. Having this information can help create and change your portfolio. For example, in December, you may feel more bullish to invest in the retail industry due to the Christmas Holidays. However, since you follow the news, you may have heard about the fiscal cliff, which will be occurring on December 31st. You decided that the fiscal cliff could affect your portfolio. Therefore you plan to change your portfolio two days before the fiscal cliff and invest in safe instruments such as fixed income. Knowing when to diversify can help you maintain your gains and hedge against risk.

In conclusion, diversifying your portfolio can not only add value to your income, but it can protect you from the volatility in the market. Don’t limit yourself and invest in one company or one industry. You may get lucky sometimes on choosing the right stock or industry, however there is still a greater chance of you loosing your money. Also, always remember to cut your losses. It is harder to gain once you loose. Stay diversified!  

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