6 Tips on How to Build Portfolio Diversification

Diversification is choosing different types of investments to reduce the risks of investing. Using this strategic way, you can carefully make a variety of assets to balance your risk. That is, if some investments go down in value, others may increase. And, when investments are diversified wisely, you will be able to secure your portfolio without giving up the level of return on your assets that you are seeking.

Many investment experts agree that you can build a diversified portfolio if you pay attention to the following essential points:

  1. You should look for stocks of companies in unrelated market sectors. Let’s imagine you create a portfolio that only has hotel stocks. Stock prices of these companies can decline following any bad news, such as covid-19 pandemic that will ultimately cause fewer visits. As a result, your portfolio will notice a significant decrease in value. In this scenario, adding more stocks to your portfolio related to the tourism industry is not recommended. It would be wise of you to diversify even further because of the risks associated with travel companies. The more different your stocks are, the better.
  2. It is best to buy stock in both large and small companies and a mix of established and new companies for a good diversification.
  3. You should diversify among various asset classes such as Sukuk and stocks. A combination of Sukuk and stocks can decrease your portfolio’s sensitivity to market swings due to opposite directions of Sukuk and supplies.
  4. You should diversify your portfolio with the securities from different countries. Some type of issues and crisis may not affect international securities. For instance, if you have US stocks, your next stock choice can be from an Asian or European market. So, investing in different parts of the world could minimize the investment risk.
  5. It would be best if you balanced growth investments with those that produce income.
  6. Considering some stocks that are currently out of favor but can increase in value.

How many numbers of stocks should I have to build a diversified portfolio?

There is no single accurate answer to this topic, although many sources have an opinion on the “ideal” quantity of stocks to purchase. The number of stocks you should hold is determined by various factors, such as your investment time horizon, market conditions, and your intention for keeping up to date on your holdings.

Diversification allows investors to minimize their exposure to unsystematic risk. This type of risk is defined as the risk associated with a specific company or industry—the more stock you have in your portfolio, the lower your unsystematic risk exposure. Indeed, owning 10 stocks is better than owning 2, especially those from different sectors.

Most retail and professional investors, on the other hand, hold at least 15 to 20 stocks in their portfolios. If you want to maintain the idea of having more than 20 stocks, consider using index funds or ETFs to provide quick and easy portfolio diversification across the different sector and market cap groups.  This type of investment vehicle lets you buy a basket of different stocks in one transaction.

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