The First Steps to Diversifying Your Stock Portfolio

The first steps to diversifying your stock portfolio shouldn’t cause you to trip and fall on your face, even as a new investor. Today, we’re going to jump right into some simple steps investors can take to manage risk by diversifying their portfolio without becoming so spread out into various assets that they dilute their opportunities to make make money trading stocks. If you haven’t taken the time to read these linked articles, or the previous two in this series (Diversification Strategy & How to Diversify Your Stock Portfolio), I highly recommend it before reading more! If you have already, well, let’s go!

Steps to Diversify your Portfolio

Here’s some of the critical points (and some conclusions we can draw) from the previous articles on diversification that should guide your steps as you develop a diversified portfolio:

  • No One’s Perfect – Therefore, we need a diversification strategy that works when we are wrong. So, one of the ways I address this issue is by incorporating an “inverse” fund… that is, an Exchange Traded Fund (or similar product) that moves in the opposite direction of the market. So, if I’m going to invest in a variety of stocks, I’ll also place an order for an inverse position such as PSQ (Nasdaq bear), DOG (Dow Jones bear), or SH (S&P bear). There are several options available to the investor, but these three are simple choices that are easy to understand. For Canadian investors, you might want to consider HXD.TO (TSX bear), HSD.TO (S&P bear) or other Horizon beta products. Not everything will go up… so without complicating matters with options or short selling, these inverse funds are a great way to diversify your portfolio so you can make money when the markets are in decline.
  • Diversify, NOT Dilute Your Portfolio – Having too many stocks can be too much of a good thing. Sure, you many minimize the impact of declines in one particular stock, but you’ll also lesson the impact of gains in another. Instead, consider letting go of bad trades to minimize your losses in positions and simply have fewer positions. A general rule of thumb would be no more than one stock for every $2500… but preferably, $5000. As your portfolio grows, the number of stocks you own should be capped at a manageable number (more on this to come). When you no longer have time on the weekend to review the latest news on your stock holdings and announcements from the companies, you hold too many stocks.
  • Develop a Global Diversification Strategy – Start with what you know… and what you use… but be careful when put all your money into one or two sectors and in only one part of the world. Consider diversifying your holdings to reflect more than one type of sector or more than one country.

A Diversified Portfolio Model

As you spread your money across various assets, consider the following investments:

  • Gold – While I’m not a gold bug, this asset is unique. It is the one global currency with limited supply (you can’t simply print more). While you can own the physical gold itself, a more reasonable approach might be to invest in a gold company. However, less risky yet is the Exchange Traded Fund trading under the symbol GLD that fairly accurately reflects the movement in the price of gold on a day to day basis.
  • Real Estate Investment TrustsREITs provide investors with the opportunity to diversify through owning land and buildings, both retail and commercial, without the large capital expenditure. Often accompanied by healthy dividends and the opportunity for capital appreciation, REITs are a smarter and safer way to invest.
  • Dividend Paying Stocks – When stocks are able to pay and raise dividends, they signal an increasing strength of the underlying business. So look for stocks with consecutive dividend increases and reasonable yields (beware of the 10%+ ones – they may not sustain them). I recently did an article on Enbridge, a company with strong fundamentals and increasing dividend payments.
  • Growth Stocks – Watch for stocks that are growing their revenues, not merely cutting expenses. If the sales numbers are increasing and they are able to generate increasing revenue with minimal expenditures, common sense says you’re likely to make money. So pay attention more to the future expectations announced in the media than whether or not they met previous targets.
  • Foreign – Consider owning a stock that is based in another country. For those in the US and Canada, this is a simple exercise since there are so many great companies either north or south of the 49th parallel. Don’t ignore them… but look for them. Many stocks, such as Enbridge or Lululemon, trade on both the US and CND exchanges. So do a little cross boarder shopping in two of the healthiest economies in the world.
  • Speculative – I hesitate to mention this one because the inclination of many investors is to be gamblers. I’m not talking about penny stocks or sub-$5 stocks. I’m talking about those lesser known names that have some revenue in place and a proven product, but may not be the leaders to their respective sectors yet. A recent name in my portfolio that matches this criteria is HEK, a lesser known oil services company.

In a couple of days, we’ll take a look at what a diversified portfolio might look like using some real figures and real stock examples. We’ll examine the small portfolio of $5000 and the larger one of $50,000 to give you some ideas. I realize many of you are newbies… and nervous about investing in the markets. A diversification strategy can go a long ways toward a good night sleep when investing. Simple principles such as “the less you have, the less risky the stocks you should invest in” can help you find success early on and build your wealth capital.

So join me in a couple of days when we’ll take the next steps. In the meantime, be sure to let me know if you’re comfortable with the pace as we take the first steps to diversifying your stock portfolio.

  1. Good stuff. It’s a constant task too as things will change over time and you’ll find yourself overweight in certain areas, so make sure to check in and repeat this exercise often.
    Money Beagle recently posted..Amazon Mishandles A Necessary Change to Amazon MomMy Profile

  2. Good advice, particularly about looking for companies that are growing rather than just cutting expenses, which can be a precursor to going under.
    John@MoneyPrinciple recently posted..Principled money posts of the week #10: the ‘Sunny Sunday’ editionMy Profile

    • Thanks. Yes, EPS is one of the most manipulated, yet followed, indicators of a company’s success. Unfortunately, investors that ignore revenue and sales and focus on earnings per share end up getting caught with falling stocks in their portfolio, and wonder why!

  3. This was very well-written and understandable to the person that gets great anxiety just thinking about investing! Thanks for the guide!

    • No problem… I hope you feel a little less anxious and realize how even you can make money trading stocks wisely.

  4. Good advice! Being wise with money and not having all your eggs in one basket is good.

    • Diversity is such an important aspect of risk management… and a key to financial success. Thanks for dropping by Janis.

  5. I need a person to really explain this to me while I ask lots of questions. lol. I am interested in stocks and building a portfolio.

    • Feel free to shoot me an email with any questions you have… and I invite you to visit here often for lots of great resources.

  6. These are great tips… if you have the money to invest in a portfolio but what if you don’t?? how do you save/plan for the future when your funds are VERY limited!? :)

    • Great Question Julie… feel free to send me an email and I’ll dialogue with you to help you in your specific situation. Thanks for dropping in.

  7. This is something I know absolutely nothing about. Thanks for sharing these tips! Deb

  8. Tks for the tips but I feel that I need a professional to work for me.

    • Perhaps you do… although you will find how easy it really is when you have a resource like Invest in the Markets.

  9. I would definitely be a newbie! :) Thanks for the information.

  10. oh man! The idea of investing just scares me-to-death! We are not in the investment phase of our lives yet, as we are paying off all debts to get rid of those interest fees. But, when the days comes and it is time to invest (next couple years) I can happily point my husband to your blog. Thanks for the information!

    • Thanks Ashley. I use some of my investments to create capital in order to pay off debts… just another strategy.

  11. I’m not into stock trading, but my husband has done some and I took a seminar on stocks once and learned a lot. It’s great to see some good advice out there, and it’s fun to see a totally new topic (for me) on a blog!
    Cambria recently posted..House-wife Home-SchoolMy Profile

    • Thanks Cambria… yes, there’s not much for the average and newbie investor. Glad I can be a resource for you and your husband.

  12. Now that I’m not working, I don’t have any money to invest. But I do have a Roth IRA. I’m hoping that will be a good investment.
    Colette recently posted..Help for the Tornado VictimsMy Profile

  13. These are all good points. Thanks for the advice. It really is not a hard thing to invest for yourself once you have some good information and understand the basics.

    • True Stacy… so many people have fear of investing, but it doesn’t have to be complicated or scary. Best to you!

  14. The stock market completely baffles me! How the prices fluctuate and change just because something *might* happen is crazy!
    Mona recently posted..Why A Pop-Up?My Profile

    • Agreed Mona… actually, you’re already on the right track. I tend to stay away from those “speculative” hopes and dreams… and stick with those with proven results and revenues.

  15. Great and very educational post! Thanks for explaining!

  16. If I ever get into stocks, I’ll have to refer back to this.
    Tami @ This Mom’s Delight recently posted..Successful Women Think Differently: 9 Habits to Make You Happier, Healthier, and More Resilient by Valorie BurtonMy Profile

    • Thanks Tami… I assume you invest in some fashion now? Have you ever considered the stock markets as an option?

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