Why a Diversified Stock Portfolio is The Best Financial Advice You Will Ever Follow

That Is A LOT of Stocks

Diversification is not a common term unless you are into stock investing and portfolio management. Fidelity Investments informs us that diversification allows you to minimize your risk by spreading it among multiple different assets. For the uninitiated, what this means in plain English is that your money remains safe because you don’t put all of it in a single stock. Time Magazine tells us that the stock market dropped to its lowest point in September 2022. In an atmosphere like this, with a recession looming, a diversified stock portfolio might be the best plan for many small investors like you and me. I’m a freelance writer by trade, and I learned what I know about the stock market by reading and doing. This article was penned to help you figure out your investment options and explain why you shouldn’t put all your hopes on one stock. Let’s take a look at diversification.

Splitting Up the Risk

Games of Chance are Risky

One of the core things that you will realize is that diversification allows you to split up the risk you’re exposing yourself to on the market. Risk, in this sense, is that the money you’ve invested could be lost if the stock you put your money in loses its value. For example, let’s say one share of Tesla (TSLA) is now worth $300 on the market. You buy that single share for $300, and then Elon announces that he intends to do something weird and crazy in typical Elon style. The share price drops, and now the stock you paid $300 for is worth $200. If you sell the stock and cut your losses, you lose $100. If you hold onto it and hope it rises, you don’t immediately lose the $100, but you’re banking on the rising share price.

Let’s look at this on a larger scale. Say you bought not one, but one hundred shares at $300 before the stock price crashed. When the price crash happens, you’ll risk $10,000 of your portfolio value. However, if you decided to invest half that in TSLA and half in something else, the dip in TSLA’s price would only affect you half as much. Splitting up your risk among multiple assets and stocks means that if one has a bad day, week, or year, the…