Diversify Your Portfolio by Picking Stocks From the Right Asset Classes and Business Sectors
It is never a wise decision to put all eggs in one basket when you are investing in equities or stocks. When you decide to invest in stocks, it means that you have realised the importance of choosing suitable wealth building tools besides your income. It underlines your ambition to make your investment grow fast and make it bigger. Before you put your money into the stock market, understand why it is it essential to focus on diversification, what it means and how it impacts your financial future. Your success in equity investment depends not only on your risk tolerance level but as well, on how well you can manage risks. Investing in the stock market is risky and you must not only learn to live with it but also know how to mitigate risks so that you do not hurt yourself when inflicted with losses.
Add variety to your investments
Investors have certain investing traits on some specified types of stocks, usually limited to one or two industry segments. To insulate you from heavy losses it makes good sense to create your investment portfolio by choosing a wide variety of stocks almost without limits. By diversifying investment, you not only lower the risk of losses from any particular investment but also efficiently earn higher average yields. In this article, we will discuss how you should proceed in diversifying investments by choosing different asset classes and by identifying different types of stocks. From stocks, bonds, real estate, commodities and collectibles to stocks from various industry sectors, the options are many. You should know what assets classes and stock sectors mean and how you can use the knowledge to create a diversified portfolio of investment.
When a group of securities demonstrates similar characteristics by following the same rules and regulations while behaving in the same manner in the market, it belongs to the same class of asset. Asset classes comprise of stocks or equities, bonds or fixed income instruments and money market instruments or cash equivalents. Real estate and commodities also form a category of the asset class. According to financial advisors, for diversification the investment vehicles turn into categories of the asset class. Here you will find five major asset classes.
- Stocks – By investing in shares of WOW ASX, you are acquiring a small portion of ownership of the Woolworths Group, Australia engaged in retail operations. From food and petrol business in Australia to supermarkets in New Zealand as well as hotels, the company has diversified business interest.
- Bonds – Bonds are debts made to large organisations including the government. Cities and corporations raise money through bonds, and the government goes to the public for money by issuing bonds. By buying bonds, you own a portion of the debt from the bond issuer, and they pay interest on the money borrowed.
- Commodities – Natural resources like oil, natural gas and precious metals like gold, silver, platinum etc. belong to the class of commodities. Any basic good used for commerce that you could interchange with some other commodities of similar type comes under the class of commodities. Most raw materials that humans consume are commodities.
- Real estate – Property like land and building are a good choice for investors and involves buying rental properties and managing it. By renting out the real estate you own to individuals or business, you make money from it.
- Collectibles – Converting hobbies into investment is possible by investing in valuable antiques, coins or famous artwork. Such items are usually rare and acquire much higher value over time like a piece of original painting of Van Gogh or Rembrandt.
Segregating stocks by sector
For diversification, you can segregate stocks according to various sectors of business. From banks to healthcare company, from the utility company to Consumer Goods Company and a technical company, you would find several options for investment. The broad categories could be asunder.
- Basic materials – Companies engaged in mining, drilling and ore extraction including oil and gas companies belong to this category.
- Consumer Goods – Whatever the consumer purchase for their daily lives from air conditioners to refrigerators and cars all belong to this group.
- Healthcare – Companies that manufacture medical equipment and drugs, provide health care services of any kind constitute this group.
- Financial – Any company dealing in financial products and services come under this category and includes banks, lenders, mutual funds etc.
- Industrial goods – This class of industries produce tools and machinery, heavy equipment for construction work as well as aircraft and shipbuilding.
- Utility – Companies engaged in providing utility services in energy products like electricity and gas form the cream of this group.
Choose the companies you would like to invest by keeping in mind that there should not be any overlapping so that you achieve the goals of diversification.
Charlie Brown is a freelance content writer. Recently, he has working for a Pittsburg-based content marketing firm. His mission is to simplify and demystify online marketing for both upcoming and long-established entrepreneurs using tools such as digital signage templates by Dopublicity.com.