Diversification: Noun: The action of diversifying something or the fact of becoming more diverse, showing a great deal of variety.
One of the founding tenets of successful investing is to make sure that your investments are properly diversified. This means that your assets are spread across various and different types of investments. The primary purpose of diversification is so that you don’t have your eggs all in one
basket.
Diversification sounds like a good idea, but how can you tell that you are properly diversified? In statistics, an appropriate sample condition can be obtained with 30 samples. Therefore if you have 30 different individual investments, you can achieve adequate diversification. Luckily, investment
companies make it even easier. Each one of the 4 ETF’s listed in this publication contain hundreds of individual companies making the portfolio very diversified.
When putting together a diversified portfolio, you need to be aware of a couple of pitfalls. You can choose a Biotechnology ETF, a Healthcare ETF and a Medical Devices ETF. In doing so, you would be invested in hundreds of individual companies, but all of the companies are associated with the medical industry. We can all hope that the medical industry will continue to grow, but this would not constitute a diversified portfolio. When putting together a diversified portfolio, you should have a range of industries represented as well as a variety of company sizes.
Additional diversification factors to consider are: your weighing between stocks versus bonds; do you want commodity exposure (gold, copper, oil, bitcoin); international exposure.
It is normal to lean one way or another between investments. It has been a good idea this year to have out-sized exposure to technology as it has out-performed industrial companies, but make sure that you have exposure to the under-performing sectors. Their time will come.