The allocation of your stock portfolio is one of the most important investment decisions you will make. In most cases, your stock portfolio allocation will determine your success. After all, the higher your returns, the more comfortable your investments will be. But, how do you allocate your stock portfolio for maximum returns?
We’ve all heard the saying, “Don’t put all your eggs in one basket.” While this may sound like good advice, it’s also true when it comes to your stock portfolio. You don’t want to depend on one company for your retirement income. Instead, you need to diversify your investments so you don’t put all your eggs in one basket.
Equity portfolio allocation is how you spread your stock portfolio across different sectors of the stock market.
How do you diversify your stock portfolio?
There are many ways to diversify your stock portfolio. The most common forms of diversification are by geography, industry and investment category (i.e. international or domestic).
1- Diversify your equity portfolio by geographic location
If you want a portion of your equity portfolio to be located in different countries, you can invest in stocks from around the world.
Stocks from different countries present different risks and opportunities. By investing in stocks from around the world, you diversify your risk because no two countries are exactly alike.
You can diversify your investment portfolio by investing in different industries or different sectors within an industry. When you diversify by industry, you invest in companies in different sectors (for example, you invest in electric utilities, telecommunications and computer equipment).
Investing in different industries or sectors within an industry means that you are not investing in companies that have a similar product or service. For example, investing in the banking sector means that you are not investing in companies that provide banking services.
2- Diversify your stock portfolio by investment category
Investing in different investment classes (for example, bonds, money market funds, and REITs) are also forms of diversification. There are many different investment classes, so it is important to understand the advantages and disadvantages of each.
Investing in different investment categories means that you are not investing in similar products or services. For example, if you invest in the “Global Equity” category of the Vanguard 500 Index Fund, you are not investing in companies that provide similar products or services around the world.
3- Diversify your equity portfolio by investment style
Finally, you can diversify your stock portfolio by investing in companies with different investment styles. For example, you can invest in growth stocks (i.e. high-yielding companies) or value stocks (i.e. companies with a low price-to-book ratio).
Investing in different investment styles means that you do not invest in companies that have a similar investment philosophy or use similar investment techniques. For example, you don’t invest in companies that are growth-oriented or have a value investment philosophy.
Now you know more about allocating your stock portfolio for maximum returns.