Why Should You Diversify Your Investments

In the sections below we will take a look at each of the types of diversification and share some examples of how to use each one.

Using geography

Person with toy airplane on world map

Another example of where you can diversify your investments is geography. That is to say, what areas of the globe you invest in.

Let’s take a look at a few countries we recommend you consider buying your investments in.

Germany

The European nation of Germany has been home to two of the best ETFs in the world over the last few years. Its iShares MSCI Germany ETF (NYSEARCA:EWG) is up roughly 500% since inception (September 2008).

It is also one of the most popular funds on the ETF trading market, with more than $1 billion in assets.

Germany has some great individual stocks too, including some very high yielding names like Bayer AG (OTCPK:BAYZF), a giant healthcare company that is on track to buy Monsanto.

Italy

Another nation to consider is Italy.

Italy’s stock market has been struggling the last few years, down nearly 30% in the last three years.

However, there are a number of companies that have come out of the woodwork with great growth potential that investors may want to consider.

For example, shares of airline company Eni SpA (NYSE:E) are up 250% since January 2014. Shares of Deutsche Post DHL Group (OTC:DPSGY) are up 500% since late 2014.

What these companies have in common is that they are on the cusp of becoming major world leaders.

Of course, you’ll need to consider the level of diversification that you want to have. One way to think about the risk is to look at how much you’re exposed to in different areas of the market.

If you don’t want to put all your money into a single country, you could start by buying a small number of small countries, perhaps something like the US and Germany, and then look to add countries that are becoming more prominent like Italy and even Russia.

How To Use Sector and Style Diversification

McDonald’s

Some investors may want to diversify across a number of sectors or even styles within those sectors.

That would be like comparing McDonald’s (NYSE:MCD) to Domino’s Pizza (NYSE:DPZ), in that you would want to invest in both of these companies as different sectors.

For example, McDonald’s is a restaurant that has survived numerous economic downturns, is highly profitable, and has a brand that is highly identifiable.

Domino’s Pizza is a fast food restaurant with rising revenues, growing debt, and a business model that could be under threat.

Now you can compare these two companies in a different way by comparing them to the four sectors of the S&P 500.

If you’re diversifying across industries, then it may make sense to buy MCD and DPZ instead of Domino’s Pizza because MCD is a restaurant that is more recession-proof, and DPZ is a restaurant that could go out of business during a recession.

If you want to diversify across styles then you may want to compare them to three other styles: value, growth, and momentum.

Value stocks tend to have cheaper prices than growth stocks, and generally have stronger fundamentals than momentum stocks.

Growth stocks tend to have superior earnings growth than value stocks, and momentum stocks tend to be volatile.

Our prime stock buying strategy

Our initial recommendation will be to avoid individual stocks, and buy a combination of ETFs.

What we are doing is creating a dynamic, target-date style fund that invests in a selection of stocks and ETFs.

The goal of the index is to maximize the total return over the long-term. It will periodically rebalance to target a particular mix of stocks and ETFs.

The actual mix of stocks and ETFs you purchase will depend on your overall portfolio. We recommend that people make their own decisions about their investments, and aim to have the money managed for them.

If you want to learn more about how we pick stocks, please click here to read about the Amazon.com (NASDAQ:AMZN) index.

The advantages of buying an index are that you don’t need to actively make decisions about what to buy, and you can focus on day-to-day performance, rather than try to predict what is going to happen in the stock market.

You also don’t need to worry about keeping track of a large number of individual stocks.

All you need to know is that, if you use an index fund, the money you invest is going to generate returns over time that are closer to the S&P 500.

With that, you can see how to use the S&P 500 index as a backstop.

When you manage your money, it is normal that you become a bit greedy at times. And you can become one of those investors who wants to make as much return as possible.

However, you should make sure that your portfolio consists of a well-balanced portfolio of companies and investments so that you could ensure good returns for your money.

1. High returns:

Diversification plays a very important role in ensuring you always earn good returns for your money. It will give you a high level of returns and protect you from any risk.

2. You get to know more companies:

The more companies you invest in, the more diversified your portfolio will be and that will give you better returns. You can get to know more about those companies and know about their activities before investing in them.

This will give you better understanding and ultimately, a good return on your investments.

3. You get an active investment:

There is a lot of risk involved in investing, but investing in a diversified portfolio helps you control and reduce your risk. This will allow you to make better decisions when investing and make investments that you can be proud of.

4. You have a large portfolio:

When you invest in a diverse portfolio, the returns can be great as you get to enjoy a better return on the total amount of money you invest. This is because every individual company you invest in contributes to the total return that you get.

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