💡diversity, it's literally always good💡
|Aug 21, 2018|
Welcome to Better Have My Money, my Monday night newsletter about stocks for clueless newbies, such as myself, who are trying to figure out the stock market. Better Have My Money is a gif-filled rundown of the stock market (from why we should care about shares when the world is burning, to figuring out wth Elon Musk is doing, and thinking about the market like it's a bad boyfriend).
Guys today I want to talk about something incredibly sexy.
OK, so it's not that sexy. BUT it is actually pretty important and clever and could be the thing that determines if you do or don't get get rich, so therefore it's inherently sexy.
I want to talk about having a diversified stock portfolio! Yes I did just try and district you with hot teen rom com hunks to make that seem more attractive!
Confusing term of the day: "diversified portfolio" — basically just making sure you have a strong mix of investments in a variety of industries and with a variety of risk. Usually this means a mix of stocks (both US and foreign companies), bonds, commodities and other assets.
No, I don't know what bonds and commodities are either, and that is a problem for future Amber to figure out.
So instead, I'll be focusing on making sure your stock portfolio is ~diversified~ and the best ways to go about that. Which basically just means taking a look at what you already own or what you want to buy and checking how that fits into the other stuff you have, so that all the companies you buy don't all look the same.
Often you'll see diversified investments being talked about in your 401k or superannuation (or both if like me, you are "lucky" enough to have retirement accounts in both countries) or a similar type of investment portfolio, where someone is getting paid a lot of money to figure out the correct mix and balance of things for growth over 10 years, or 25 years, or 40 years.
First things first: you want a diversified portfolio so that you're protecting yourself from risk.
The idea of a diversified portfolio is having a mix of stuff so if for example, the airline industry collapses, you're not only invested in airline stocks and you lose all your money.
Diversified stocks might mean a mix of industries; a mix of risky might-become-a-bajillionaire-from-them growth stocks plus blue chip stocks that pay you dividends; a mix of US and international businesses, buying exchange traded funds (ETFs) and individual companies, etc. The idea being that when one stock or sector or country collapses, you're in a stronger position to not be affected because you don't have all your golden money eggs in one basket.
Now every financial experts seems to have a slightly different take on what diversified means and how many companies you should own stocks in to make you DIVERSE.
Some say it means buying only ETFs because then you're not buying an individual company (I've explained in a previous edition why I personally don't do that even though it's like the supposed best investing advice there is) but you're buying individual stocks in a bunch of companies.
Investors Business Daily chairman William O'Neil reckons that people with $3,000 should only have two stocks and those with $5,000-$20,000 should only have max three stocks (I am very glad I ignored that advice cause how boring!!!). But he has an interesting point that: "The more stocks you own, the harder it is to keep track of all of them... Broad diversification is plainly and simply often a hedge for ignorance."
The Motley Fool, which is where I get most of my financial advice from, recommends owning at least 15-20 stocks before you count as being "diversified," but making sure you're actually paying attention to the companies and not just diversifying so much that you get rid of your growth.
I agree that it's an important balance of having a mix of companies AND not too many companies that you can't actually follow them individually and note if they're underperforming, being involved in a sexual harassment case, going completely bankrupt etc.
This piece of advice from Motley Fool is good (altho I myself do not follow it):
"As a quick example, if you believe that you have enough time to follow five companies closely, then it might make sense to buy a 5% position in each. Then, invest the remaining 75% in broad-based index funds. Doing so would allow you to sleep well at night and protect you from a busted stock, even though you only own a handful of individual companies."
For me, obviously, the biggest determiner of how many different stocks I own is mainly just a straight up issue of how much money do I have.
Initially I bought stocks in $600 lots. Now I just buy stuff depending how much extra cash I have — and then usually buy one company's worth. Last week that meant selling the 20 odd shares I've gotten free from Robinhood from when people sign up using my promo code (we both get a free share) and putting that money towards buying two PayPal shares, worth a whopping $170.
Alright, so it's time for a little check in on my own stocks, for the first time in a few weeks, so I can look at my own diversification efforts:
Despite having only $5,000 (altho I am saying "only," I am genuinely blown away that I now have $5,000 invested in shares, that would have seemed impossible one year ago!!!!!!!!) in shares, they are across eight different companies.
Many of mine are the tech industry, but in different aspects of tech: Netflix is video streaming service; Match is online dating; Okta is a cloud computing identity management system (fancy way of saying one site that remembers all your passwords) and PayPal (which owns Venmo) is online finance.
Starbucks sells coffee from its cafes and Cronos Group makes recreational and medical marijuana. Estée Lauder and iRobots both make consumer goods but those goods are makeup and skincare, and vacuum cleaners, respectively. I guess they are sort of all retail goods? So maybe that's too many retail.I'm probably too tech heavy but that also makes sense based on my own personal interests and also means that I — most importantly — am interested in paying attention to these companies.
But definitely ways I could improve the diversity of my portfolio. Right now, most of my money is in Netflix (literally 30%) and that means when it, just for example, falls, oh I dunno, like over 30% in one god damn month, then I see a huge drop in my investment!
So I need to be very careful about not just buying shares in more companies but also making sure the amount I'm putting in is enough to change Netflix's dominance.How do you make your share portfolio diverse? What cool new stocks are you going to buy so that you don't lose all your money when something happens to Jeff Bezos?Better Have My Money is on Twitter @bhavemymoney, so please tweet nice things (aka the link to our sign up page) and tag us. Got a friend who wants to be rich? Forward this onto them and tell them to subscribe.
As always, if you've got any questions about stocks, this is a shame free zone. Just reply or email me and ask away.All this talk of diversity just reminds me of how incredibly un-diverse media is (yes I am now referring to people not businesses, it's an awkward segue OK!).
I'd encourage you donating to The Ida B Wells Society, an organization focused on encouraging and retaining investigative reporters and editors of colour. Invest in the future of media.