| Diversifying your stocks portfolio is especially | | | | greatest investor of all time, has a slightly insular way |
| important in today's economic climate as you never | | | | of diversifying and lets face it who can argue with his |
| know which industry will next be affected by the | | | | success? He's tended to invest heavily in a small |
| recession. | | | | amount of companies so his portfolio is not as |
| The concept of diversifying your portfolio is quite | | | | diversified as most. He's always stated that by |
| simple and it just means that you should not put all | | | | trading stocks frequently in an attempt to diversify |
| your eggs in one basket so to speak. If you own | | | | simply gives the stock broker more money and will |
| stocks in an airline don't purchase more stocks with | | | | reduce your profits because you have to keep |
| another airline. Look at a different industry altogether. | | | | paying for trading fees. Warren Buffett has always |
| Think about it like this, if there's suddenly a large | | | | stated that it's better to invest more in a stock you |
| increase in operational cost such as fuel for planes | | | | already own that spread your money around so |
| then this will affect all of the airlines. If you own | | | | thinly in the hope that you'll hit all the bases. |
| stocks in more than one airline this will affect the | | | | This brings me on to index funds. Warren Buffett is a |
| price of all your stocks. It makes much more sense | | | | great advocate of using index funds and believes |
| to spread your bets around different industries. | | | | that they are suitable for the majority of investors. |
| Others will argue that if sticking with my example, | | | | This takes the skill out of investing in stocks by |
| the airlines suddenly start to see a large increase in | | | | simply buying the whole market. For beginners to the |
| passengers you'll feel the surge in stock price as | | | | stock market this can be a sure fire way of getting |
| profits will rise. This is of course true but in my | | | | long term returns. No research is required you simply |
| opinion it's not worth the risk. It's much more of an | | | | buy the same amount of stocks each month across |
| insurance policy to look elsewhere to diversify your | | | | the market and the handling fees for brokers are |
| stock portfolio. | | | | exceptionally low. Index funds aren't as exciting as |
| So how much should you diversify? This is entirely up | | | | buying stocks by yourself. You won't find anyone |
| to you and will probably relate to how much | | | | hanging around parties bragging about an index fund |
| knowledge you have in a particular area and how | | | | they own but no one can question the long term |
| much cash you're willing to throw around buying | | | | profits by sticking with this method. |
| stocks and shares. You want to keep your portfolio | | | | In summary index funds may be the best way for |
| manageable so it might make sense to keep it to 5 | | | | the majority of us to diversify out portfolios and still |
| industries or how ever many you think you can | | | | make a decent long term profit by investing in the |
| spend the necessary time on. Warren Buffett, the | | | | stock market. |