A wise investor would on a timely basis review investments done in his portfolio. Investments especially in stocks need to be diversified as just investing all of one’s funds in just one stock would be critically dangerous given the volatile nature of markets. The phrase Don’t Invest all of one’s eggs in one basket is probably derived from this experience, eggs here are referred to stocks and if an investor invests all his eggs in the same basket (industry/sector) he would be taking a big risk and could would suffer huge setbacks should that chosen industry crash due to any factor. What you should do is start trading and diversifying at an early age.
I would further like to explain this example citing a recent example in India. Last year the aviation industry went through a lot of churn and volatility due to a host of factors, which had a domino effect on the respective airline stocks. In this case if an investor has a large composition of his investments pertaining to airline stocks, he would have a tough time as the prices of share stocks would surely have dived sharply due to volatility across the industry.
Had the investor been a little wise taking cues from what is happening to his stocks and revalued the stock composition of his portfolio, he could have made corrections before suffering more losses.
Portfolio diversification when trading futures refers to the diversification of one’s portfolio so that one can minimize the chances of loss especially when the share prices fluctuate due to market volatility in a particular industry. Here ideally the investor would be investing in a wide variety of stocks from varied sectors, and again ideally he would be doing additions and subtractions of stocks after carefully reviewing them on a periodic basis.
So in the earlier cited example, had the investor spread his risk across different industries and not just concentrated on the aviation sector he would probably have profited or his losses would have minimized considerably. There are scores of investors today, who have done the same mistake as referred above wherein they had heavily invested into just one company or stock in the hope that the concerned stock or company would do well dramatically in the short or long run.
In the scenario that an investor has only limited knowledge about how to go about portfolio diversification, it would be prudent to take the guidance of a financial planner.
A financial planner from a reputed financial services provider would be able to better understand your current investments and would be able to give a practical road map on how you can achieve your financial goals in a particular time frame.
Also a financial planner being trained on financial advisory would be able to offer you more options for fund investment. Earlier availing the services of a financial planner was considered to be the privilege of only the HNI’s and super HNI’s, but in the last 5 years this has changed considerably with investors understanding the fact that the charges charged by the right financial advisor minuscule if he is able to guide them on how to go about sharpening their portfolio towards their financial goals.
portfolio diversification is an essential need for wealth creation, dear investor ponder over the examples cited above if your portfolio still has a larger composition of just stocks from just one company or sector, it would be highly advisable that you diversify it for your own good.
1. Views as are mentioned in the article are personal views of Author and nothing to link with Co., its Director and Employees.
2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment.