How to Diversify a Portfolio

Have you started investing but do not know how to diversify a portfolio? You wonder how many stocks you should be owning or how to find investments that can improve your diversification?

Here are two ways to diversify.

Buy More Stocks And…

A simple way to diversify our portfolio is to buy more stocks. However, that does not mean buying any stock. You have to be aware of what risks you are trying to diversify away from. If you already own five oil and gas related stocks, buying another five oil and gas related stocks would not help to diversify away from the oil and gas industry at all.

Before you diversify your portfolio, you have to understand which risk you are not comfortable with at the moment. If you feel that you have too many investments in the property sector, then you might want to consider buying your next investment away from the property, construction, REITs or even hospitality sector.

If you are worried that you are too exposed to the Singapore market geographically, then you might want to buy companies that have more international exposure. In this way, you will be able to diversify away from the risks that you are worried about.

Buying Other Asset Classes

When it comes to investing, we can think of our entire wealth as our portfolio. Thus, it means that our stock portfolio is just a section of our entire portfolio. In order to have a diversified portfolio, we can consider buying into other asset classes as well. This might include properties, precious metals, private businesses, bonds, peer-to-peer loans, wine, art, etc.

The options are endless. However, the fundamental concept of investing would still apply for all these other asset classes. It is important to know that we should stick to investing for the long-term and based on fundamental reasons rather than just speculating our money away.

Foolish Summary

Diversification is indeed important in investing. However, we should not just practice blind diversification. We have to understand the reasons behind our diversification. In this way, we would be able to create a portfolio that would allow us to sleep soundly at night.

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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 Stanley Lim doesn’t own shares in any companies mentioned.