According to Wikipedia, Diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets.
For the occurance of the same event(good returns) in share market, we aim to average our profits and maximize the benefits by diversifying the portfolio. Diversification serves as a tool to reduce risks by allocating investments among various financial instruments, industries, and other categories.
Diversification will not guarantee you no risk but definitely does lowers it to minimum when you invest in different sectors, industries and more. It’s the most essential component to attain the long term financial goals by minimising risks.
How to diversify
- Checking on different industries & sectors
- The news reports , politics and economic conditions
- Check on competitors and their upcoming moves.
Tips to diversify
Consider your portfolio having Bank shares and Automobile shares. When bank price falls down you may see auto industry gaining per share price. This is because when bank price falls , interest, mortgage rate falls. And this lead to consumer buy more of auto loans which make the auto industry price go up. There’s a correlation between them which allows you to get good returns.
The steps aren’t one time thing you do. It calls for constant peeking out. You shouldn’t only invest in different companies but in different industries as well. The uncorrelated stocks are better because none of them will affect each other and you can maximize profits this way.
For instance, if the above example of bank sector price were moving downwards. If it has raised instead then your automobile, housing and many sectors would have been affected leading you to loss in 2 of the 3 shares in your portfolio.
Search the top few companies from every sector which are related and non related you are interested into, look at the trends and graphics from the last few years, watch for the upcoming events that may affect the price and then invest in the unrelated first. These are better than correlation ones.
You should remember that all investment vehicles cost the same, so buying and selling may be expensive—from transaction fees to brokerage charges. Just have a look at that as well.
Which industry and companies I prefer
I made more than ₹1,50,000 in last 3 months because of applying the diversification strategy while buying the stocks. The companies I preferred were Tata Motors , PCJ and ONGC . As you can see none of them are related and I diversified my funds into them. I dealt with short term investment based on the trend that follows in these stocks.
Before buying PCJ, I watched the market graphics of it for the last 2 year trend. The share is at its lowest till February and highest by April-May. So when the stock was undervalued I bought 1000 shares at ₹66. By the end of the rising period the share reached ₹140 by 16 April leaving me a profit of ₹73,000.
I bought Tata motors the same time because of the news reports and also because this share keeps on doing well as it’s a blue chip company. I bought 1000 shares at ₹154 and by the 18th April it reached ₹230 and I sold it. It made me profit of ₹76,000.
I thought to invest in oil corporation so after a short research I found ONGC. So I bought it’s 500 shares at ₹134 for a week or two. I sold it at ₹145 gaining ₹5,500.
Therefore diversifying my money into different unrelated shares and creating a well diversified portfolio earned me ₹1,54,500. Diversification reduced the risk and averaged my profits. Else there would be a chance that I would have invested all the money in same company or same sector and uncertainties would have vanished the money I had.
It can’t eliminate risk 100%
Unfortunately, even the best analysis of a company and its financial statements cannot guarantee it won’t be a losing investment. Diversification won’t prevent a loss, but it can reduce the impact of fraud and bad information on your portfolio.
You cannot be 100% safe when you want higher profits. The risk will go hand in hand. Minimising the risk by investing smartly into different sector Top-Cap shares can help you prevent some risky situation due to their blue chip reputations. Still it’s not always gonna do well every days, weeks and months.
Final words about good diversified portfolio
Diversification means ensuring that you spread your capital amongst different investments so to not to be reliant upon a single investment for all of your returns.
It is useful to minimize the risk of loss in case of poor performance of an investment over a period of time. Other investments may perform better over the same period, reducing potential losses in your investment portfolio if all your capital is concentrated in one type of investment.
A diversified portfolio means spreading risk by investing in at least 4 to 5 good stocks within asset classes such as purchasing shares across different industry sectors. Diversification can help an investor manage risk and reduce the volatility of an asset’s price movements but can’t eliminate risk completely.