5 things to help you Diversify
Diversifying is something that all traders should do. You don’t want to put everything in one basket by just sticking to a single Online Trading Platform. When the market falls down you’ll lose everything, too. This is something that keeps surfacing in all expert reviews like HQBroker Review.
Here are five things that you should always remember when trying to diversify your portfolio.
Have the Correct Number
There’s no exact number of investment that you should own. You don’t have to chase after the Next Big Thing all the time.
Here’s the thing: once you exceed five or six investments, there’s a big possibility that you have a lot of overlap. You might also be adding up futile investments that you don’t really need.
Now, you need to know this: you can get almost all the local and foreign diversification you need just by using three kinds of index funds. The first one is a total US stock market fund. Second one: a total US bond market fund. And lastly, a total international stock fund.
Understand your Investments—thoroughly
You have to ask yourself, “Do I know what I’m investing in?”
And when we say understand, we mean not only the basic ideas about your investments. You can’t say that it’s a leverage exchange traded fund that can give you a return twice that of the Standard and Poor’s 500. You also can’t say that you own a variable of annuity that can give you a return of 7 percent a year.
You have to understand things comprehensively. For instance, you have to know how leveraged returns are exactly calculated, because that has a big implication for what return you will get. You also have to know what that 7 percent guarantees and what it is being applied to.
If you don’t understand how an investment exactly works, you can’t know if you really need it in your portfolio.
Know Why You Bought Them
You can’t know if you need an investment if you don’t remember why you bought it in the first place.
You have to know how your investment works AND you have to know the role it plays in your portfolio. If, for example, you know how that investment works, what’s it for? How does your portfolio benefit from it?
You must know how this or that investment improves or derails your portfolio’s performance. You should be able to quantify the benefits you get from every investment. You can try citing researches or figures that can tell you exactly how this investment affect your whole portfolio.
Frequency of Addition
The only thing that you have to do is to make sure that your portfolio is well-balanced. If you are adding new investments in your portfolio all the time, you’re probably breaking the balance you are trying to create.
Anyhow, you can always do some monitoring and rebalancing. You may even replace hopeless investments with new, more promising investments.
The main point is you don’t have to constantly add new asset classes or investment, especially if it’s just because your investment firm brings them out.
The key is: understanding what you are doing. Just like what Warren Buffett says, you have to invest in what you know. You can’t capitalize of vague ideas, or hearsays. Do your homework and try to know what’s going on in as many things as you can.