An essential way of lowering risk |

Portfolio is a common term used in
trading world which refers the entire collection of assets of an investor. It
includes all kind of securities and financial
services like shares, bond, equities, pension plans, mutual funds, forex
currency, real estate, even physical assets like gold and silver. A portfolio
is like the whole system of an investor, through which he would interact with
other systems. So, it is very important to manage portfolio properly.

Portfolio management

Portfolio management is essential
in stock investment and trading. It doesn’t mean to create a portfolio by
choosing suitable and profitable stocks and other financial assets only.
Portfolio management requires regular maintenance and change if you really want
to bring out maximum return by your portfolio.

Portfolio diversification is essential to lower the risks; Image Source: Portfolio diversification: An essential way of lowering risk

There are some factors like
diversification, investment cost, regular investment, follow-up buying etc.
which are to be taken into consideration for effective portfolio management.
Among them, diversification is the prime factor to look out for. Before we
discuss about diversification in details, let’s take a look at the other
factors shortly.

  • Investment cost: This is a
    major sector where investors have to spend a lot of money for commission and
    management. This expense is even heavier for those who trades stocks i.e.
    regularly buys and sells stocks. There are 2 ways you can minimize this cost.
    You can go to brokerage firms which would cost lower than free agents. Or you
    can stop frequent trading out of panic.
  • Regular Investment: Your
    portfolio won’t be more enriched by anything else than regular investment. This
    will at the same time establish your investor image and diversify your
    portfolio. Besides, investing in various sectors regularly will reduce the
    possibility of major loss effectively.
  • Follow-up buying: Nobody
    knows how he’s stock is going to perform at the time of buying. So, if you buy
    a large number of stocks at a time, there is always a chance that you might
    face a huge loss. So, it is better to buy in small proportion and observe the performance
    for some time and then putting huge money on that very stock.

Portfolio diversification

Imagine you are carrying 100 eggs
in a basket on a car. An unexpected small accident could destroy all the eggs
in that basket easily. So what should be the strategy? The smart strategy here
is carrying the eggs in several separate baskets. If something happens too, not
all the eggs will be affected then.

Image Source: mnacritique.mergersindia.com

This safety process of eggs is
exactly same as portfolio diversification. It is done for safety from total
loss. Portfolio diversification simply means to invest money in different
assets and financial securities to reduce the chance of overall loss. Imagine
you put your all the money in a single category stock. All’s ok until the
stock’s performance is up to the mark. But, if a sudden negative trend starts
in the market, you’ll lose all your money at a time! So, portfolio
diversification is necessary to avoid unexpected situation.

How to diversify

Diversification doesn’t mean
investing at random. There are some particular strategies to follow to
diversify your portfolio. Choosing different sectors is not enough. You’ve to
choose different sectors which are different in genera as
well. You might think investing in automobile engine, wheel, body parts etc.
are diversifying your investment. But, this is partly diversification as all of
them are from same automobile manufacturing genera.

What you can do is choosing
different sectors of production like manufacturing, export, IT etc. Again,
investing in securities is good you should go for other financial services like
fixed deposit, mutual fund, bonds, physical asset like gold, silver etc.

Image Source: Elearnmarkets.com

Besides, go for the investments
which are not much risky i.e. the non-cyclical sectors like pharmaceuticals.
Sectors like pharmaceutical never falls down with the market. Even when the
market is going through negative trend, pharmaceutical sector continues to do
good as medicine is compulsory for everyday life.

Limit

Now that you know diversification
is essential for the growth of your business and keeping your asset risk free,
you might want to diversify as much as you can. Well, that’s a terribly wrong idea.
Diversification is not proportionate to safety or return after a certain limit.

In fact, too much diversification
could make you lose some good opportunities of making big money from a single
sector. So, diversify your investment to a limit. Experts say, 15 to 20 stocks across
different sectors is good enough for risk mitigation. After that limit, you
should concentrate on the present ones.

One last word; don’t assume that diversification can totally eliminate your risks. Rather, diversification can lower the risks only. In fact, nothing can totally eliminate risks. So, better diversify your portfolio and reduce the risks as much as possible.

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