Diversifying Stock Portfolio

Last updated: April 9, 2016

Diversify, Diversify, Diversify

Diversification means spreading your money among many investments to lessen risk. The idea is to avoid a situation in which your investments are concentrated in too few holdings. If big declines happen in the value of just one or two of them, this could wreck your portfolio. 

  • If you buy individual stocks, you probably need at least 20 to 30 companies from a variety of industries. This will provide diversification to lower your risk substantially.

For instance, you might strive for a mix of stocks that tend to fare well in different economic environments. There are strong, stagnant, declining, and inflationary economies. Perhaps you want to blend growth and income stocks in the portfolio, and add a dash of small-company and emerging-markets stocks. The appropriate blend of stocks depends on personal circumstances, including:

  • Your Time horizon (when you’ll need to spend the money) 
  • And your tolerance for risk and volatility (your ability to sleep at night when stock prices fall).

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