One of the trending acronyms in the stock market today, “YOLO,” supports the idea, at least among those new to investing, that you only live once. So, the idea behind YOLO is that you should invest everything in one stock and hope for the best.
You can liken this idea to investing all that you have in a really big win. However, to win the bet, lightning has to strike twice in a certain location. While you will win that bet if you choose the Empire State Building, you will probably lose big if you choose a flag pole – even though the potential is there.
Therefore, you really cannot consider this attitude to mimic an wise investing mindset. You may as well move the stock exchange off Wall Street and locate it at Caesars Palace. While this approach may prove profitable – sometimes, it is bound to fail, as it’s simply not sustainable. Just like gambling, this method is fun, as long as it works.
When it comes to investing in the stock market, investors need to diversify their portfolios instead of going “YOLO” and investing in one stock. Through diversification, you can capitalize on a profitable opportunity while mitigating risk at the same time. To win as an investor, you need to spread the risk and DIVERSIFY, not go YOLO over one stock pick.
Building a Stock and Investment Portfolio: What You Need to Ask
To build a financially diversified stock portfolio, it helps to answer the following questions:
- How many years am I from retirement?
Even if retirement is a long time off, you still need to answer this question when making investment choices. With a longer horizon of time, you can add stocks that show long-term promise to your portfolio.
- What are your portfolio goals?
- Hedge against possible losses
- Increase my overall return
- Preserve my savings and capital
- Protect my wealth – safeguard my financial legacy
- What type of retirement account(s) do you have?
- IRA (Traditional/Roth/Self-directed)
- Brokerage account
- 401(k) or 403(b)
- Savings and checking accounts
- Brokerage account
- What percent of your current portfolio is made up of traditional assets, such as stocks and bonds?
- 25% to 50%
- 50% to 75%
- Over 75%
- Among your stocks, what industries are represented?
- Real Estate
- Consumer (Discretionary)
- Consumer (Staples)
- How worried are you that a recession may affect your portfolio in the next 10 years?
- Not worried at all
- Somewhat worried
- Very concerned
Basic Stock Categories
The above questions will help you decide on how to improve your current portfolio. To increase diversification of your stocks, you need to recognize the differences in the types of stocks. Stocks may be listed, categorically, as follows.
Growth stocks, today, represent innovative companies – ones that represent products and services that make money at a faster rate than an average business in the marketplace. Remarkably, even after years of rapid rises, growth stocks Include established names like Alphabet (GOOG), Netflix (NFLX), and Amazon (AMZN).
Value stocks represent companies that offer share prices that trading at market caps below what they are worth. It’s like buying a $100 bill for $85, at least in theory.
Dividend stocks represent stocks that give investors a reliable income and the potential for long-term growth. However, not all stocks that pay dividends are good investments. To play it safe, you could choose dividend stocks, such as Coca-Cola (KO), Johnson & Johnson (JNJ) and Procter and Gamble (PG).
Small Cap Stocks
Normally less stable than larger company stocks, small cap stocks represent businesses with a value of all shares outstanding or a market capitalization between $300 million to $2 billion.
Large Cap Stocks
A large cap stock represents any publicly traded company on the exchange that is valued at over $10 billion.
Blue Chip Stocks
A blue chip stock is a security that has withstood the test of time and generally displays the following characteristics.
- Is a leader in its field or industry with a reliable business model.
- Has a track record and strong following with shareholders and consumers.
- Has a history of providing long-term and significant returns.
- Regularly pays dividends, increasing its payouts to shareholders over time.
Diversify, Diversify! (Tips to Remember)
- Never keep all your investments in one bundle. Keep your asset allocation spread out by buying different stocks and funds for balance. Then diversify those asset classes. For example, you may have small cap stocks and large cap stocks. Further diversify these asset classes by choosing technology stocks, consumer stocks, financials, and industrials under these headings.
- Round out your portfolio with bonds, real estate, and other asset classes.
- Consider global diversification too. For example, you could gain exposure to Norway via the Global X MSCI Noway ETF (NORW).
Asset classes include equities, fixed, income (bonds), or cash. You can invest in these asset classes by putting your money into stocks, mutual funds and ETFs.
Exchange traded funds (ETFs) offer a stock investor an excellent form of diversification, as the account can feature as many as 100 stocks.
Mutual funds, which represent a diversification of stocks, are considered an investment vehicle, not an asset class.
One Final Thought
A well-balanced portfolio contains a variety of stocks, REITs, mutual funds, ETFs, a few bonds, and cash. When it comes to creating a portfolio, variety is the key to wealth, especially when investing on the stock exchange. Change your investing strategy now.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.