How to Apply Diversification to Your Investing Portfolio
Diversification is key. If you are looking for new areas to invest or have some money on the side, look no further!
Cut Through the Noise
In this week’s newsletter I wanted to write about the topic on everyone’s mind: the stock market, investing, and Bitcoin. You have all probably seen countless tweets, memes, and news headlines about the crazy world of investing. If you cut through the noise of GameStop and WallStreetBets, you will find the actually useful information about investing.
When it comes to investing, the golden rules that I follow are as follows:
1. Invest only what you can afford and let it sit for years, not months.
2. Focus your investing around on your goals and background knowledge.
3. Diversification.
If you stick to those three rules, you are on your way to a great investment portfolio!
What is Diversification?
The definition of diversification is simple. It is a technique used to reduce risk by spreading your investments across a wide range of industries and types of investments. That sounds smart, right? Well, that’s because it is! As you have been seeing with Corona Virus, economic shutdowns, and problems on Wall Street, it can be crucial to have a wide base. That is why I am dedicating a whole newsletter to this concept!
Let’s Dive into the Investments
Now, in this newsletter I want to give all my subscribers a look into what I invest in, giving everyone an example of diversification. I will be breaking down how my investments are allocated based on percentages and exactly what I invest in to spark your imagination and give you the push you need to start your own investing portfolio.
A note before we begin: This is not financial advice. All written statements are my opinion and my views on current financial markets. Make sure to always consult with a professional before investing in anything. None of this information guarantees positive results.
Investment Allocation
In this first section we will go over the different categories of investments I am involved in. The three types of investments are Individual Stocks, ETFs or Exchange Traded Funds, and Cryptocurrency.
The chart below shows how much I have invested in each of the three categories of investments. As you can see, 10% of my funds are invested in Individual Stocks, 26% of my funds are invested in ETFs, and 62% of my funds are invested in Cryptocurrency.
Where, What, and Why + Bitcoin
As many of you might be asking yourself, “why is a majority of your portfolio cryptocurrency?” Well, the answer is simple. This chart is based off of the total value of each investment, and if you have been following the markets you will see that cryptocurrencies are seeing a large bull run at the moment, specifically Bitcoin.
A good way to practice diversification in your own portfolio would be to allocate a certain amount from each of your paychecks to evenly spread among the different types of investments you would like to be involved in. That way, you are able to be consistent and track your funds and maintain effective diversification. This chart varies on a week-to-week basis according to how the assets are performing.
Now, let us jump into each of these investments and take a closer look.
Individual Stocks
Take a moment to read the color key at the bottom of the graph. These random-looking jumbles of letters are something you really should know if you are getting into investing. They are “ticker symbols” that are the identification for a company traded on the stock exchange. They are stock nicknames, for lack of a better explanation. For example, AAPL is the ticker symbol for Apple. WMT is the ticker symbol for Walmart. MFST is Microsoft, NOW is ServiceNow, CHWY is Chewy, etc. You get the picture.
As you can see, this is a very average-looking stock portfolio. The pie chart above outlines a medium range of nine individual companies I invest in. This chart is broken down into what percentage each position makes up in my individual stock portfolio.
Diversification is about making sure you have all your bases covered, and to do so you want to research the best performing companies in many different industries. Notice how this graph, as compared to the Investment Allocation Percentage graph, is spread evenly throughout many more categories? Yeah, that is on purpose, and that is what you want yours to look like as well if you are going for diversification.
I once received some great advice from a wise, old investor. The Yoda of the investment world, if you will. He told me to go through a normal day and keep my eyes open for the companies around me that would make for a valuable investment. Look at the world through an investor’s eyes for one day and see what I find. So, I did, and here is what my day looked like:
“When I wake up, I go downstairs and eat food (WMT). While I am eating, I check my phone on the latest news (AAPL). Then I go to work just like my friends and family (MFST) (NOW). While I’m working, my dog is always wanting a treat so of course I give her one (CHWY).”
As you can see from that story, I am investing in the companies I interact with every single day and know a lot about. I encourage everyone to do this for a day and see how many companies you interact with on a daily basis. This will help you build a great list of companies to start researching. Overall, this will give you a wide range of industries to keep you on track with a diverse portfolio.
Warren Buffet is quoted with this iconic quote to show the importance of investing in what you know, “Never invest in a business you can’t understand.” This is very important when picking which stocks you end up investing in.
ETFs (Exchange Traded Funds)
ETFs are the last part of my portfolio. These are basically a collection of stocks being tracked by this single index. For example, the VOO ETF I invest in tracks some of the largest S&P companies like Microsoft, Amazon, and Google. How I have diversified this section of my portfolio is by making sure I am covering all my bases. As you can see, I have large, medium, and small companies being tracked, as well as International companies and bonds.
This gives me a wide range of diversity for a lot of growth potential but also protection against market falls or corrections. I have labeled each of these ETFs ticker symbols in parenthesis for you to go research them.
Recap
I hope this gives everyone a good example of how you can start diversifying your investment portfolio or if you have not even started, this will be just the thing you need to read to start your research.
I have always been a huge advocate for teaching young people about investing and finances. It is something we miss out on in most school systems because it is not required curriculum and instead just offered as an elective that most people do not end up taking.
So, I want this to be everyone’s kick in the butt they needed to start taking ownership of their finances and setting themselves up for financial freedom one day. I mean who doesn’t love the thought of not having to worry about money some day?
Once again, disclaimer: All the information in this newsletter is my own opinion and not financial advice. Consult a financial expert before investing. None of this information guarantees positive results.
You Should Definitely Share: The In-Between Newsletter
This newsletter has been growing so much since I started it in August! We are already up to 120 subscribers. Let’s keep the momentum going!
I want this newsletter to be for anyone, all ages, and all backgrounds.
Like I said above, I feel like the public school system does not always teach us some of the most important information we need to be ready for the real world. And so, The In-Between Newsletter was born. I write about topics ranging from career, finances, personal development, and everything else in between that I think everyone would benefit from.
So, if you know anyone that would benefit from a weekly newsletter written by a great, humorous, overall exceptional writer, then share the link and just put in an email!
I appreciate all the endless support and look forward to growing this thing even bigger.