Why you should diversify your portfolio well?
By: Diversify Well
Tags: Investing, Money, Portfolio, Finance, Risk Management

Financial risk management is one of the most important aspects of building wealth. That’s why I would like to share what I think about why you should diversify your portfolio well in the long run.

The risk you are willing to take with your portfolio may depend on you current wealth, age, your fixed income etc. If you are young and have a good job, you live in a country which is politically and economically stable and not afraid of future, you probably take more risk than someone who is in the opposite situation.

Basically, I would never increase the level of risk for an amount of money I would cry when I lose. Let’s say you have €10.000 and this is all of your money in the bank. Losing how much would affect you psychologically? €500 or €5000? If €500 would hurt you, you should diversify well at least %95 of your money.

Everyone knows, you must also have heard many times, never put all your money into one basket. That is right. Here you should define the basket well. What is the basket? How many baskets do you need?

The right answer is the more baskets you have are better for you. For me, 2+1 baskets are at least necessary, the first one is a stocks basket, the second is an ETFs basket and the third one is the cash basket. If you are a financial guru, you probably won’t spend time in the blogs and already having more complex baskets including bonds, funds, commodities, and currencies, etc.

Then I personally diversify each basket specifically. Giving an example about the stock basket. I consider a few things such as but not limited to;

how many stocks should I split my money into?

is the % equally divided or some stocks will have more weight in the basket?

is the stock I buy in a growing economy? which countries are they from?

in which industries are these companies operating?

what are the risks when all of these companies are in one basket?

what is the proportion of value and growth stocks in my portfolio?

do I aim to get dividend?

I am sure you will have many more questions in your mind when you decide to diversify your portfolio better.

Diversifying ETFs can be a bit less problematic but the returns can be lower. I also consider a few things when buying ETFs as below;

is the ETF representing a sector or geography?

what is the weight of countries and sectors in the ETF?

what is the yearly cost of the ETF?

is ETF from an emerging market or a stable one?

how many ETFs should I have to diversify better?

Another thing is, for example, how much cash you should keep aside in case you need urgent money or if the market crashes to invest from bottoms. For me, this could be between %25 to %35 depending on the inflation. Higher the inflation is, lover the cash I would keep.

Like I said above, everyone should calculate their risk management specific to their own situation and get a consultancy if they are not knowledgeable about the topic. Everyone has a different case, different conditions in their life and I think it is almost impossible to have 0 risk if you have money, but the idea is how to decrease the level of risk to minimum and benefit more. Good luck with yours!