Diversify your portfolio

Research also shows that owning a mix of assets is less risky than holding one asset. This arises because the prices of these assets don’t exactly move in tandem. It is usually applied between asset classes (stocks, bonds, and real estate) and within the stock portfolio (by industry, by geography).

Spread your stocks over at least 10 companies. If your investment is large enough, increase to about 30 stocks.

Spread your stocks across different industries which are not fully correlated. Example: banks, retail, property, consumer goods, commodity, industrial goods.

Spread over different countries if possible. Research shows that diversification across sectors produces the lowest risk portfolio, followed by diversification across countries. If you live in a small economy, it makes sense to invest overseas. If there is trouble in your country, your overseas investment may escape the trouble. Many rich people in Argentina and Indonesia lost their fortunes overnight when these country’ currency devalued dramatically. Even people in Malaysia and Thailand lost a third of the net worth (measured in foreign currency) in 1997~8 during the Asian financial crisis.

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