Diversification is one of the strategy we can use when we started to invest in stock market. In fact diversification is applicable to other types of investments too. On this short article, I will share some basic information how to invest in stock market using diversification method.
What is diversification?
In a layman’s term, diversification in investing is the process of allocating your money to different kinds of investments. This is being done to minimize the risks involved in your investment. For example, if you want to diversify your investment, you should not only investing in stock market or any other equity based investments. You should have investment in real estate, businesses and other investments vehicle available. By being diversified, you are minimizing the risks or losses if something goes wrong or something happen on one “type” of investment you have.
In stock market, diversification is applicable too. You can diversify your investment in stock market by buying stocks in different sectors. It means that you will not only buy stocks in “financial” sector and will also buy from other sectors in the stock market. As Warren Buffett quote, “don’t put your eggs in one basket”.
How to apply diversification in stock market
If you want to invest in stock market using diversification method, you need to buy stocks in different sectors in the stock market. This way, you’re minimizing the risks involved if something happens on a specific sector or that sector of the market goes down. Here are the different sectors in the Philippine stock market.
As you can see, we have 6 different sectors in our stock market namely financials, holding firms, property, services, mining and oil and last is industrial. To diversify your stock market investment, you should buy stocks in different sectors. In case the market of “financial” goes down, you can balance and minimize the risks if the market for “property” is going up.
To be more specific, you don’t want to have BPI, BDO, MBT (Mentro bank) only on your portfolio because they are on the same sector which is financial. You should have other stocks from other sectors like JFC (Jollibee) from Services, MEG (Megaworld) in Insdustrial and others. That’s the concept and basic idea of diversification in stock market.
*Please note that I’m not recommending these stocks, it’s just for illustration purposes.
Why diversify in stock market?
As mentioned above, investing in stock market using diversification helps you minimize and balance the risks involved when something happens or issue arises in a particular sector of the stock market. This is because if there are issue on a particular sector, say mining and oil for example, almost all of the mining and oil stocks will likely be affected. If you are diversified, your stock portfolio or investment will not only depend on a single sector and will have the opportunity to go up while other sectors are down. This is the basic reason why people diversify their investment in the stock market.
Diversification is a good strategy but may not be applicable or advisable for beginners. Especially if you’re starting with limited capital. Diversifying your investment in stock market will surely need some capital since you will buy different stocks in different sectors. I prefer or suggest to use peso cost averaging method especially for beginners.
Diversification maybe applicable for you but not for the others. Choose which strategy is best for you when you start investing. Your strategy should be aligned with your financial goals. And lastly, invest in yourself first to gain more knowledge and information before investing in any type of investment instrument available. To our financial freedom, cheers!