Tag Archives: portfolio diversification

Why Diversifying Your Portfolio Matters?

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You probably have heard about the saying “do not put all of your eggs in one basket” because if you do, you would not have anything left when the basket falls. The concept of diversification has been a long topic in the field of investing. By now, you may already know the basic meaning of diversification and it is making a wise distribution of your investments over the different sectors of the market.

In this article, you are going to learn the utmost importance of diversifying your portfolio and why you should do it immediately.

Diversify to Soften Drawbacks

As you diversify your portfolio, you lessen your risk for market defeat especially when a particular sector is under-performing.  Asset allocation is a wise way to adapt to a changing market environment.

Since nobody can precisely predict the outcome of the market, diversification can be of help a lot to the investors and be able to survive even the most harsh market conditions. When the inevitable happens, your other investments can offset the losses.

Diversify to Maximize Returns

Aside from protecting the health of your portfolio, diversification also gives you the opportunity to maximize returns by investing in different areas that would have a different reaction to the current situation of the market. By allocating your investments among several different financial instruments, businesses and even categories, you are somewhat guaranteed against losses.

Diversify to Target Across the Board

This setup can be regarded as superior diversification. That is, diversifying your portfolio across the board. Normally, when investors diversify, they do it with several companies. But when you do across the board diversification, you target different types of industries.

The more your stocks become unconnected or unrelated with each other, the better and more advantageous it is for your portfolio.

Another across the board technique is diversifying among different asset classes (i.e. bonds and stocks, equity markets, etc.). When adverse events happen, such types of assets would react differently since you have a combination of asset classes. Just like what is expected, unpleasant movements in one class will be counterbalanced by the upbeat results from the others.

Diversify to Own More than Owning Just One

Another obvious reason why you should diversify is because it is better to own more stocks than just having one. Market experts suggest that optimal diversification is achieved when an investor owns at least 15 to 20 stocks expanded across several industries.

However, it is still important to apply proper risk tolerance to determine the right assortment of your own choice of assets.

Conclusion

Generally, market downturns and risks affect nearly every stock.  Diversification may not completely protect your portfolio from risks or even guarantee elimination of chances of a loss, but it can help an investor manage the risks and reduce the impact of market volatility.

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Mutual Funds: Advantages and Disadvantages

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Like the other existing investments, mutual funds do have their advantages and disadvantages. It is important to know these before you make your final decision and invest in mutual funds. Doing your research is a vital action on your part. In this post, both the advantages and disadvantages of mutual funds will be presented to help you decide rationally and sensibly.

Definition of Mutual Funds

Mutual funds are a type of investment vehicles comprised of a pool of funds from several investors to meet the purpose of investing in a number of securities like bonds, stocks, currency exchange and other similar assets.

These are being managed by money managers (those who are in-charge of investing the fund’s capital to generate capital gains and achieve profits for the investors). The portfolio is structured and conserved in such a way that it matches the objectives of the fund as specified in its prospectus.

Advantages of Mutual Funds

  1. Instant Diversification

Mutual funds invest in a wide array of securities. If you are aiming for a diversified portfolio, then investing in mutual funds is for you. A mutual fund can offer you with a basket of stocks.

  1. Account Size Does Not Matter

It is perfectly alright if you have a small-sized investment account or if you only have limited capital to begin with, since a mutual fund offers you a wide range of exposure to several stocks, you do not need to buy such stocks yourself. Once you, chose a mutual fund, you are given access to diverse portfolios and to participate equally in the gain or loss of the fund.

  1. Specialized Money Management

 Fund managers are considered as experts in the investing field. Hence, mutual fund companies have more capability and resources than the average individual investor.

 Disadvantages of Mutual Funds

  1. Intraday Trading Not Possible

The “NAV” price is unknown, thus, you cannot really employ intraday trading strategies. It makes intraday trading impossible on sudden price movements in the market.

  1. Loss of Connection

 In mutual funds, the investment decisions are not reliant on you. Chances are your decision would not be regarded unless you will be called for some quarterly investor calls and updates. This in turn translates to a lack of interpersonal connection both to your account and to the people in charge of the fund. It can mean difficulty for you when managing your portfolio. The decision to buy or sell an asset is dependent on your manager.

  1. Costs are an Issue

 Costs are a part of a mutual fund’s reality. As a matter of fact, such costs can decrease your overall profits.

  1. Fluctuating Earnings

 The possibility that the value of a mutual fund will decline is high. Like other investments, you might end up with no return at all. This is due to the fact that mutual funds are affected by the price fluctuations of the stocks that constitute the fund. It does not mean that it is being run by a professional manager, the performance would be impressive.

  1. No Insurance

Mutual funds are not insured against losses – therefore, there is a possibility that losses can occur or even losing your entire investment.

Conclusion

Mutual funds both have the gains and downsides, and as an investor, you should be able to evaluate such carefully. The probability of success in a mutual fund tends to increase if you know what you got yourself into and if you totally understand the basics.

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