When it comes to investing in stocks, one of the ways to reduce risk is through a diversified stock portfolio. Diversification is essentially a method of stock investing wherein investments are allocated in various sectors, industries and stock categories. Through diversification, a stock investor may be able to reduce the risk against possible losses on a certain sector or industry and also maximize returns. Although it may not be a fool-proof guarantee against losses, stock diversification does provide a means to minimize risk and enable investors to have a better chance to reach long-term financial goals.

Diversifying A Stock Portfolio

There are various diversifying a stock in which investors can go about in diversifying their stock portfolio. But no matter how they do it, the methods usually follow basically the same principle. Here are some of the most common tips to go about diversifying a stock portfolio:

Assess Your Risk Level

Before you go out and try to diversify your stock portfolio, make sure that you are aware of the level of risk that you can afford to make. This might depend on your own investing style, goals or even age. Try to assess and know what your risk tolerance before you make any moves so that you can determine what you can and can’t do once you go on to diversify your investments.

Mix It Up

Now that you are aware of your risk level, then you can now start trying to determine what stocks to include into your portfolio. Since the objective is to create a diversified portfolio, then you might need to mix it up well. Try to look for good combinations with potential for good returns when choosing your stock portfolio. Here are some of the possible ways that you may be able to mix it up quite well:

  • Try to own stocks from small, middle and big companies in terms of market capitalization. If your risk level is not that high, you can consider investing a bigger percentage in big companies. For the more aggressive types, investing stocks of small or mid-range companies that are showing promising growth potential may be considered.
  • Try to buy stocks from companies in different industry sectors. You may consider buying stocks from companies in the manufacturing, tech, commodities or financial sectors. Having shares of stocks coming from varied sectors of the industry will ensure that you would not be severely affected in case one of them suffers through a considerable downtrend for long periods which might otherwise result in costly losses.
  • Consider a small percentage for foreign stock. You might also want to add in a small percentage of your portfolio by owning some promising foreign stocks. It might also help buoy up your portfolio in cases where there is a general down trend that is happening nationwide.

When it comes to stock portfolio diversification, there is no single set of accepted rules. Diversification can be based on experience and careful analysis of the various markets. Ultimately, stock diversification comes down to personal choice and preference when it comes to stock investing. The results may not always be similar among different investors. But diversification does help a lot in terms of minimizing overall investment risk.