It’s the second Saturday of May and it’s time to unpack the second content of our Labor Month Package. Last Saturday, we have seen the first topic which is “What is a Stock Market Portfolio”. Today, we will reveal the second content: Diversification.
You often hear people saying, “Don’t put all your eggs in one basket”.
The successful investors in the stock market like Warren Buffet and Bo Sanchez are putting their “eggs” (oopss, not the eggs you’re thinking about 🙂 ) in various baskets. They own different businesses and invest in different companies and the Stock Market is just one of their baskets. And it does not end there. Their stock market “baskets” have several small “baskets” where they scatter their “eggs” 🙂 into. These investors are teaching us to diversify our investments.
First, let’s look at the red and green colored figures in the gain/loss column in the figure below.
Red indicates a loss, while Green indicates gains.
As you already know what the two colors mean, let’s now have a look at the 3 important reasons why we must diversify.
1.To maximize your earning
Investing in different companies from different industries offers opportunities to investors to earn more as the companies gain from their respective business transactions. And when the returns of investments from these companies are collected, the possibility of collecting more is high.
2.To minimize your loss
Likewise, owning shares of different companies protect you from losing a huge amount of investment. It may even let you earn although some of the companies you invested in are not performing well.
As seen in the portfolio below, some companies such as ABS, FGEN and PIP are at loss. Take note that FGEN has the highest loss of 3,194.60 Pesos. Adding all the losses of investments in these 3 companies, it amounts to 3,561.17 Pesos.
However, the other companies are gaining, and adding up the investments in the mutual funds, the total gains amount to 5,826.7 Pesos.
So, by scattering money in different baskets, you will minimize your loss and it might even let you earn though you have lost money from other companies.
In this portfolio, the total gain is higher than the total loss. So instead of losing money, the investor has actually earned.
3.To balance your gains and losses
However, number 1 and number 2 do not happen all the time. There are times when your portfolio turns bloody like the one below. Sometimes it is even bloodier. But through diversifying, the loss can be minimized and there are times that the loss equals the gain in which you haven’t either lost or earn any.
BONUS: How to Properly Diversify a Stock Market Portfolio
Newbie investors usually misunderstand the term “diversify”. Others think that they already have a properly diversified portfolio when they have bought shares from different companies. But if the companies are under the same industry or sector, the risk of losing money is still very high. Again, spread the eggs, spread the seeds, in various companies from diversified sectors.
In the sample portfolio above, the investor has shares in 7 different companies plus a mutual fund investment. Let’s put them on a table.
So, can we say that this newbie investor’s portfolion is properly diversified?
To Sum up, diversifying a stock market portfolio is necessary to maximize earnings, minimize the loss and to balance the gains and losses. In short, to minimize the risk of losing your investment.
It is also necessary to note that when we say “diversify”, we have to scatter our money in the different companies under different industries or sectors.
Here ends the second content of our Labor Month Package. If you have some questions about this topic, please feel free to leave your messages on the comment box below.
P.S. 1: Please come back again when we open the third content of our Package next Saturday.
P.S. 2: If you liked this post, please feel free to share it with your friends. In the meantime, I invite you to join our subscription list to download your free e-book, How Did I Enter into the Philippine Stock Market-Mt step by step guide. The subscription form is just at the right side of this page.
P.S. 3: You can also visit the Truly Rich Club by clicking here and listen to Bo Sanchez’ message on why we need to invest. You may also join the club to received the many blessings that can help you to your financial success.