The story of Eggs and Basket : You might have heard that “Don’t put all your eggs in one basket.” If that basket drops, they could all break, & also ruining your breakfast! This proverb is very popular in the world of stock market because it helps us to understand the importance of portfolio diversification.
But the fact is that, instead of following this proverb, people are using Mark twain’s approach, that is we are putting everything into one large basket, hoping and praying that we don’t trip, or that nothing bad happens to the global economy, either of which could tumble down your eggs.
Why Portfolio Diversification?
Diversification is a risk management approach that reduces the overall effect of unexpected move in any individual investment. Diversification provides balance in your portfolio and the risk will be distributed among the investments. There is huge potential for higher returns since the portfolio is diversified. The main objective is that “It helps you to balance your risk across different types of investments and gives assurance of obtaining the anticipated return on the portfolio”.
Here are some steps that helps you to make decisions to put your eggs in different basket.
Portfolio is the group of financial assets such as stocks, bonds and cash equivalents. And management of portfolio is the art and science of making decisions about investments to objectives and balancing risk against performance.
1. Specification of investment objectives
Before you build your portfolio, set your investment objective first. i.e. how much capital you need to invest and for how much time period you want to hold your security as per for what purpose you are investing.
2. Formulation of portfolio strategy
When you buy something, you think twice right. If you plan for buy a new car, you will do research like how many car models are available in the market under your budgets and which will give best performance among all the options available. Right!
Same here, when you enter in the stock market, you need to do research to select best stock for your portfolio. You can do it by two methods.
- Fundamental analysis
- Technical Analysis
Or you can ask the financial experts who will help you to select best performing stock from different sectors. You need to make little efforts to do some research on stocks and different sectors of the market.
3. Selection of securities
Once your research is done, the next step is to select the stocks from the different sectors. To diversify your portfolio that helps you to take more return and minimize your risk you need to select the best performing stocks from different sectors.
4. Decide your capital draw down
This is very important step. Before you think about huge profits, prepare your self to accept the loss. i.e. Put stop loss. Pre-decide one thing that, if any loss occurs, how much loss per trade you are ready to take. It will help you to save your capital from huge losses.
Why it is very important because – Investors don’t know that with certainty whether the economy will be growing rapidly or be in recession. The greater the chance of a return far below the expected return, the greater the risk. It helps you to minimize your risk by putting stop loss per trade.
5. Portfolio execution and evaluation
Portfolio evaluating refers to the evaluation of the performance of the investment portfolio. It is essentially the process of comparing the return earned on a portfolio with the return earned on one or more other portfolio or on a benchmark portfolio.
On the other hand, it addresses such issues as whether the performance was due to skill or luck etc.
Remember that, you’re investing objective is to make money in a way that effectively balances risk and return. Rather than focus on other eggs, concentrate on your selected eggs and your basket.
By, Rapid Tips