Emotional discipline is one of the hardest things about the trading game.
There’s news going on if Bill Gates hadn’t diversified his portfolio and sold Microsoft shares, his fortune would be 1.33 trillion dollars today.
Is diversification such a bad thing? It only is if you don’t know what you’re doing—especially if you’re a trader of FOMO or FOBI.
This lack of emotional discipline typically shows up in one of two ways:
Fear of Missing Out (FOMO) in the market: For a teenager, FOMO is seeing their friends having fun without them on social media. For an investor, it’s the thought, “I see my neighbour making money on cryptocurrency, so I need to buy cryptocurrency.”
Someone with FOMO tends to follow the crowd. This mindset can lead an investor to measure their success by comparing their returns to others, rather than focusing on the returns needed to achieve their own financial goals
Fear of Being In (FOBI) the market: FOBI is the internal thought, “I know how this story ends—I need to sell my stocks.” Someone with FOBI often listens to news sources that profit from pessimism. While it’s easy to hit the sell button, it’s much harder to know when to get back in.
Do any of them sound like you?
If you’re more risk focused, you might be becoming a bit concerned by rising concentrations in your portfolio.
Ignoring this issue could lead to worry and regret later on.
A simple solution is to maintain a portfolio that is highly diversified across different markets, sectors, and company sizes—from large to small.
Diversifying your portfolio is a great way for traders to keep their emotions in check. When you spread your investments across different areas, it helps you avoid the fear of missing out on the next big thing because you’re already covering a lot of ground.
Plus, it also eases the worry about being stuck with a bad trade—if one trade doesn’t go well, it won’t take down your entire portfolio since your money is spread out across different assets.
Diversification can protect you against losses from a single investment failure or underperformance in one asset class, such as a drop in the stock market or issues with a fund manager.
Say, you’ve decided to start trading, and you know that your investments can rise or fall in value.
Following the adage of “Don’t put all your eggs in one basket”, you buy some stocks in a few companies. As things go well, you decide to mix in some forex trading. Finally, you toss in commodities as the finishing touch.
Now, you’ve got three key ingredients: stocks, forex, and commodities. Each of these can be broken down into smaller pieces—different stocks, various currency pairs, and a mix of commodities like oil and gold. This helps to reduce the risk of a cracked nest egg.
While each investment is distinct, they all come together to create your portfolio—the final cake. Just as every ingredient affects the taste of a cake, each investment impacts the overall success of your portfolio.
Here’s a deeper look at what that means, as well as four tips to help you quickly diversify your portfolio.
For example, just having a house, an investment property doesn’t diversify your investments. If property values drop, you won’t have other types of investments to balance out the loss. To diversify, you could invest in different types of assets like stocks or bonds.
We’ve written an article – and studied what Elon Musk thinks – on top 4 assets to inflation-proof your portfolio
Different markets are affected by different factors, so by investing in various regions, you’re less likely to be hit hard if one market underperforms.
Secondly, it can boost your returns. Since markets don’t all move in sync, investing in different regions lets you take advantage of their varying performances, which can lead to better overall returns.
If there’s one key lesson we’ve learnt from the Covid-19 pandemic, it’s to spread your investments across various sectors. This approach helps minimise the impact of downturns in any one industry and gives you the chance to benefit from growth in different segments of the economy. So, if you’re mostly invested in one sector like tourism, consider also investing in other sectors such as healthcare, or technology.
Incorporating both undervalued and high-growth stocks in your portfolio is a smart way to balance stability and potential rewards. Undervalued stocks offer steady returns and lower risk, while high-growth stocks provide the chance for significant gains but come with higher risk. By combining both, you can reduce overall risk while still benefiting from growth opportunities, creating a more balanced investment strategy.
Diversifying your portfolio is made easy with CFDs (Contracts for Difference) because they allow you to trade a wide range of assets without owning the underlying asset. With CFDs, you can access global markets and trade various asset classes, including stocks, indices, commodities, forex, and cryptocurrencies—all from a single account.
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