As the old saying goes, don’t put all your eggs in one basket. When putting together an investment portfolio, diversification is the most important rule. By diversifying your portfolio you spread the risk around and make yourself less vulnerable to swings in the market. You don’t need to be an expert trader or a financial analyst to diversify your own portfolio, but you do need a basic understanding of how the process works.
What is a portfolio?
A portfolio is a collection of like items—think about a photographer and their collected pieces, or a designer’s portfolio of work. Likewise, when talking about investing, an investment portfolio is a collection of assets like stocks, bonds, cash, and more. To diversify a portfolio means to spread your investments out into a few different categories of those assets.
Diverse portfolios are ones made up of a mix of investments, reflect the investor’s goals and risk tolerance, and are regularly reassessed.
Why is diversification important?
By diversifying your portfolio you minimize the risk of your investments. Building a diversified portfolio means keeping your investments in balance, with gains alleviating any losses. Having a variety of investments helps handle risk while still getting exposure to market growth.
Investing in the stock market is an inherently risky practice; truly nothing is guaranteed. However, the market has provided 10% returns annually, on average. That 10% comes with a few ups and downs, and maintaining balance within your portfolio can lead to higher gains in the long run, as opposed to chasing in the hot asset of the moment.
The stock market reflects a blend of companies that come from various sectors. Together, they create a holistic view of economic performance. Sure, single stocks can overperform and beat the average market return, but they can also underperform the market.
Diversification is a safeguard against economic, cultural, and political factors that might harm one company or sector, or benefit another.
Choosing diverse stocks
When looking at the available options there are a few key indicators to guide your decisionmaking process. Some investors go with what they know, or what they know the most about. Investing in companies that are in areas you are already familiar with in or interested in enough to follow, the changes in the market may not overwhelm you as much.
Price-to-earnings (P/E) ratios are the measure of a current share price relative to its per-share earnings. P/E ratios come from public information are used by investors and analysts to determine the relative value of a company’s shares.
The debt-to-asset ratio is another calculation that investors can use to make sure a company is a solvent one, is able to meet current and future obligations, and can generate a return on their investment. The information is available on the balance sheet that a company releases during its quarterly report. A debt load of less than 40% is ideal.
For example, companies like PayPal and Synchrony are making headway in the cashless transaction arena. Being at the forefront of industry technology can mean growth. Keep in mind that potentially high-growth companies come with both reward and risk.
Company culture can also have an impact on its balance sheet. Public’s Themes can help you find companies and ETFs that match your values and interests, with available Themes like “Combat Carbon,” “Women in Charge,” and “Enter the Matrix.”
Diversification on autopilot
If all of that seems like too much to deal with, you aren’t alone. The creation of ETFs and mutual funds is a dream come true for anyone who craves balance but doesn’t necessarily want to do the work themselves.
An exchange-traded fund, or ETF, is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange. They’re very similar to mutual funds, but with one twist: An ETF is bought and sold like a company stock during the day when the stock exchanges are open.
A mutual fund is a pool of money from many investors brought together in order to invest in a large group of assets, like stocks and bonds and sometimes even other mutual funds. The portfolio holdings are managed by professionals. The many individual investors buy shares that rise or fall in value based on the performance of the fund’s holdings.
These investors don’t own the stock in the companies the fund purchases, but share equally in the profits or losses of the fund’s total holdings — that’s what puts the “mutual” in “mutual funds.”
You can invest in ETFs through Public, either by purchasing full shares or by purchases slices of ETFs, just like stocks.
Day trading vs. long-term investing
Day trading means making trades and holding stocks for just a few hours, or even a few minutes, making the most of the little changes in an asset’s price. All transactions are opened and closed on the same day. To be able to get ahead of those little changes, you need to be on it all day long, watching every movement. Think of it as the racecar driving of investing.
Long-term investing, on the other hand, means of making trades that stay open for months, and often decades. You build a balanced portfolio and let the market roll on over its ups and downs while sitting tight. Think of it as the RV cruising of investing.
The foundation of long-term investing relies on purchasing stocks at a low price and then holding onto them until their price goes up in time. Public makes it easy and affordable to enter the market by offering slices, AKA fractional shares.
Fractional investing means that you don’t pay full price for each share, you pay what works for you and the shares you’ve chosen are “sliced” up to fit into the purchase. With a Public account, you have the opportunity to connect with fellow investors, comment on their activity, and exchange ideas in a transparent environment. The community features allow you to discover new companies that fit into your existing ideals and can help you reach your investment goals.
The bottom line
There is always a little bit of risk involves when you invest. To mitigate that risk as best you can, diversification is key. Mixing up your assets keeps you balanced and able to weather the storms of policy, industry, or market fluctuations better. Public makes it possible to build a portfolio you are proud of and share your investments with other investors so you can transparently exchange ideas.