Here's a Fastlane tip: Diversification is essential for good management of your own stock portfolio. But what does that mean? It means that even if you own some high flying stocks and they're making a lot of money on paper right now, you need to consider selling some of that stock in order to diversify your portfolio. I know that sounds crazy but there was a time when owning Blockbuster Video stock seemed like a very wise investment too. I remember going into Blockbuster. They don't even exist today.
Recently 40% of the gains in the S&P 500 came from just five stocks. They're called the FAANG stocks. I know you've heard of them. Facebook, Amazon, Apple, Netflix and Google. Now I have stock in some of those companies and let's face it, I've enjoyed the upswing in their value over this past year. Personally I have an investment strategy to never hold over five to 7% of any one stock in my portfolio.
So when some of my FAANG stocks grew last year and became more than 5% of my portfolio, I took a portion of each of those stocks and reinvested that money in other industries and frankly in other sectors. That diversified my portfolio which will protect me from losing a lot of money when a quick downturn occurs in the market.
Rule number one, evaluate your portfolio and stay diversified. Rule number two, make a plan and diversify even if that means rebalancing and selling a few of those strong performing stocks.
A diversified portfolio might include key asset classes like stocks, bonds even real estate, course cash and tangible assets. Having a lot of investments doesn't make you diversified though. Having different kinds of investments does. Your portfolio should include assets that don't move in the same direction and certainly not to the same degree. And it should include assets that even move in opposite directions. That way if one asset class is declining, another is still growing.
I want you to evaluate your investments on a regular basis. I do it every quarter. Then rebalance your investments when necessary just I did with my FAANG stocks. I stuck with my plan and I diversified. An essential tip to managing your money and your portfolio.
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