Low Risk Diversity: Building a Broad Stock Portfolio

Jeremy BiberdorfBy: Jeremy Biberdorf

November 9, 2016November 9, 2016

Low Risk Diversity: Building a Broad Stock Portfolio

A diverse stock portfolio is an important part of smart investing, but many people struggle to adequately diversify their holdings because of the work involved. If you want to invest in stocks across a range of industries, you’ll need to do your research, and researching multiple industries takes time.

For some, it just seems easier to invest in a narrow range of stocks – even though that opens you up to greater losses. It’s challenging to strike a balance without spending all your time poring over quarterly reports.

If you want to avoid the dangers of a narrow portfolio, there are a few strategies that can help you invest smartly without living under piles of research. By approaching your investments with these factors in mind, you’ll be on the path to success.

Think Correlation

One of the most effective ways to diversify your portfolio is by investing in related stocks in different industries. If stock A goes up when stock B goes up but they’re not in the same business, then they are directly correlated.

For example, a company that makes military equipment will likely see rising stock prices if the country goes to war. But oil prices also typically go up during wartime. These stock groupings can be considered correlated under those circumstances.

Ask For Advice

Although investing can be a competitive process, don’t be afraid to ask for advice from more experienced traders. While they may not give you specific stock names, many are happy to offer advice that will save you costly mistakes.

Though it’s possible their advice won’t be coherent with your trading strategy, in most cases, it will prevent you from putting your money in dangerous places.

Rely On An Index

Indexed funds are a smart investment because they’re organized to grow at a relatively fixed rate. Someone else has done the research and grouped stocks in a proven way. Investing in indexed funds, like putting money into bonds, is a good way to make sure you’re coming away with a profit and insulating your investments.

Consider Size

Many new investors seek out big companies with affordable stock – think anything from JCPenney, which costs under $10 a share, to the pricier Johnson & Johnson, which is now trading at almost $120 and has nearly doubled in price over the past 5 years. What you consider affordable depends on your investing budget, of course.

Either way, the attraction to big companies is understandable; many of us have a “too big to fail” mentality, regardless of the fact that this has been proven wrong more than a few times. With this in mind, then, work on diversifying your portfolio by investing in companies of all sizes.

Small, medium, and large companies typically fall at different price points and are subject to different market factors, giving you a protective edge. One way to invest in large number of companies is to use M1 Finance. M1 Finance has several pre-built M1 Finance expert pies to simplify the process.

A diverse portfolio is a profitable portfolio, so spend time assembling a collection of stocks you can rely on. Motley Fool stock picks are a great example. Follow market trends, think critically about what industries are interconnected, and know when to get out. Having a diverse portfolio, after all, doesn’t mean you can sit idly by and expect the money to come rolling in.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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