How Can An Investor Diversify His Investments?

“Don’t put all your eggs in one basket” is a common advice that most investors hear – and it may be wise to heed it.

Over-concentrating our investments means that we run the risk of having any bad decisions cause huge damage to our long-term performance. Most of us individual investors, in my opinion, do not have the luxury that the pros have – the time and resources to make concentrated bets.

So, what practical diversification strategies are there that are available for individual investors? Personally, I think we can diversify in two simple ways.

First, we can diversify by sector.

This means we can invest in companies from different sectors. In Singapore’s stock market, there are many sectors we can choose from. For instance:

  • We have Oversea-Chinese Banking Corp Limited (SGX: O39) in banking;
  • Wilmar International Limited (SGX: F34) in agriculture;
  • Sembcorp Industries Limited (SGX: U96) in oil & gas and utilities;
  • Raffles Medical Group Ltd (SGX: R01) in healthcare;
  • Singapore Telecommunications Limited (SGX: Z74) in telecommunications;
  • Genting Singapore PLC (SGX: G13) in tourism;
  • CapitaLand Limited (SGX: C31) in real estate;
  • and Dairy Farm International Holdings Ltd (SGX: D01) in retail.

There are more, of course. But I had mentioned only eight stocks for a reason as well. In super investor Joel Greenblatt’s book You Can Be a Stock Market Genius, he mentioned that having eight stocks can remove up to 81% of the risk that comes with owning just one stock.

Second, we can diversify by asset class.

Under this form of diversification, investors invest in different asset classes (such as equities, cash, and fixed income instruments) in different proportions, depending on the risk appetite of each investor.

For a more in-depth look at asset allocation, you can visit our general guide here.

Foolish Takeaway

Diversification, as I’ve shared, can be important. If you ever find your portfolio being overloaded in one asset class or only a handful shares, you may want to spend some time thinking if you fully understand the risks involved – risk can be a double-edged sword, which may lead to great rewards or losses.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.