To diversify means you are investing your money in many different companies’ stock. If you want true diversification, you need to also invest in stocks of different industries as well. This further reduces risk because most likely at least some of the stocks will gain.
It’s really not that difficult to understand why you should diversify. The problem comes when you actually need to start diversifying. A lot of people think it means buying 40 different stocks.
Should you buy 40 stocks in order to be properly diversified? If it’s not, then how many should you buy? It is not a good idea to buy stock in 40 different companies. This is simply because there is no way you’ll be able to keep up with researching 40 different companies on a regular job along with the rest of your life.
Before you purchase the stock of a corporation, be prepared and find out everything you can about the company. Read their annual reports and understand the financial statements. You should follow the company in the news and see what their plans are for the future. Don’t put money into a company you don’t know and especially not if you don’t understand how they make a profit.
If you invest in 40 companies, there is no way you’ll be able to devote enough time into research for each stock. It takes about an hour or so per week for each stock for good research. With 40 weeks, that’s another full time job. If you can’t devote any time, you should be investing in something else like mutual funds.
You should invest in at least 4 different stocks to be well diversified and should not try to go over 10. It really doesn’t matter how much money you are investing, this is a good rule of thumb either way.
You don’t need to be invested in tons of different stocks to really be well diversified. This is a common misconception. In fact, you shouldn’t be invested in too many. You need to be able to keep an eye on your investments and keep up with them. Stay diversified with a few stocks in different industries and you should be good.