Diversification is key to investing in the Stock Market

When it comes to managing our capital it is essential diversify investments to reduce the risks that could lead us to ruin. No matter how safe a business may seem, there is always a risk (and if we do not see the risk then we have a serious problem) so it is vital to cover our backs and not invest a very high percentage of our money in a single business. Or as the saying goes, don't put all your eggs in the same basket.

The Stock Market is not outside this rule and therefore when investing in the long term it is important to diversify in the following ways:

Temporal diversification

Do not invest all your capital at a certain time. No matter how cheap you think the stock market is, it can always go down - even down much more - so it is not a good idea to invest at once. If you plan to invest your money in a relatively short term, the best thing you could do is divide it into 10-15 parts and invest in the Stock Market on a regular basis every 1-2 months. It is possible that the stock market is rising and you end up buying at lower prices, but the opposite can also happen and you always cover yourself against a possible peak that makes you invest all your money when it is higher.

Diversification in companies

Do not invest all your hair in a single company, no matter how much cofinaza you may have in it. Even if you think that this action is the best, you can always be wrong and the opposite happens. Also, if you have everything invested in a company and decide to suspend the dividend (as Telefónica did in 2012), you would have a serious problem if you depend on the dividend to live. Therefore it is recommended divide your investment in several companies.

How many companies to invest in?

Well that depends on the capital invested. For people who are just starting out and invest very low amounts, it is advisable to invest in a few companies (3-5 companies) since otherwise the management is complicated and if they have custody commissions or similar they can eat a lot of money. But for those who have a significant amount on the stock market, I recommend a minimum of 10 companies to be well protected.

Geographic diversification

This is the most controversial issue since many people invest all their money in the Ibex 35. This does not necessarily have to be a bad thing since the main companies of the Ibex35 are multinationals that operate in many markets so you are already investing (indirectly ) in various countries. But even so, it does not hurt to avoid having everything invested in a single Stock Exchange since you avoid country risk. For example, in the recent crisis we saw how companies that were listed on the Ibex but had their business outside of Spain were heavily penalized by the Spain brand. This should not be expected but markets are like this and money always runs away from risk and at that time Spain was synonymous with risk.

Also, if you want to avoid the complexity of investing in foreign markets directly with stocks you can always use ETFs.

Sector diversification

The different companies that make up the Stock Exchange are organized by sectors: banking, telecommunications, food, construction, ... Avoid investing a very high percentage in a single sector since if this sector behaves badly on the stock market, it will totally affect its portfolio of stocks. Find the best companies for your strategy within each sector and buy those stocks.

And this has been it for today. As you can see, these are very simple tips for diversify your investment in the Stock Market.