Diversified investing without a stock index
Direct stock investments can be a sufficiently diversified investment if done right. This means it doesn't require a stock index fund to be diversified because economists have demonstrated that the benefits of diversification can be achieved with only a few shares. Holding 30 or more stocks provides most of the diversification benefits.<<<<<<< HEAD
Compared to an index fund, a diversified equity portfolio has the advantage that there are fewer commissions and no counterparty risk. We call it Do-it-yourself indexing.
For diversified investing the following three points need to be considered:=======
For diversified investing the following two points need to be considered:>>>>>>> 8de0a2967ed20c4494a5d2de4ffe079b43e7099a
Diversify over time
First, a point that is often forgotten: Share purchases and disposals should always be carried out over longer periods of time. Therefore, never say, "Let's invest now and then we are all done". It is much better if the investing happens over several months and vice versa. So:
That's what safe investing is all about
Because you never know where the ups and downs of the stock market will be.
Mix industries and size classifications
Industries with bright prospects are generally valued higher than industries with poor prospects. Therefore, the good industries rarely provide a higher return than the bad. The focus on a special industry therefore rarely make sense, because the expected returns are not better.
The size classification of a company should not be taken into consideration, because they behave differently depending on the phase of the market. In good times smaller stocks tend to profit more because generally there are fewer concerns to invest in shares. When times get tough, the big players benefit more because shareholders flee to safety. Since you do not know what the future holds, it is recommended to mix the size classifications in your portfolio. For safety reasons, laymen should stick with larger stocks (XL or XXL) because they are generally more stable.