Bas Kooijman, CEO of DHF Capital S.A., Asset Manager, and Author.
Twitter’s co-founder Jack Dorsey was offered $500 million by Facebook to sell his up-and-coming app in 2008. Although the company had a fluctuating value of between $60 million to just upward of $150 million at the time, Facebook’s behemoth-sized bid was rejected by Dorsey.
His decision may have been quite surprising, however, he ultimately proved that patience is indeed a virtue—and largely in part to Elon Musk, who purchased Twitter for a whopping $44 billion in October 2022. Since then, Musk has rebranded Twitter and renamed the company X, which Time reported caused the brand value to lose between $4 billion to $20 billion. With Musk boasting a net worth that exceeds $230 billion at the time of this writing and having seemingly countless ventures that diversify his income, his finances will likely remain safe.
To me, this illustrates the importance of diversifying one’s investments. If you understand how to diversify your stock investments, you can help safeguard yourself against unexpected storms. With that said, whether you’re an experienced investor, a beginner or somewhere in between, here are three things to keep in mind:
Understand your risk tolerance.
It’s often said that if you invest more, you’ll make more because “the higher the risk, the higher the reward.” But you could also lose more or even lose it all.
For example, if you bought 100 stocks of a company at $25 per share when it was first listed on the New York Stock Exchange, that would have cost you $2,500. If you sold all of those shares a few years later when the company’s shares were at an all-time high of $75, then you could have made a $5,000 profit. If you had purchased more stocks and followed this same strategy, your returns could have been even greater, as 1,000 shares would have landed you a profit of $50,000, and buying 10,000 shares would have enabled you to walk away with $500,000.
Now, let’s flip the scenario and pretend you purchased 1,000 stocks of the company at its all-time high price. (Of course, it’s recommended to invest in a stock if you are expecting higher returns and not buy into the hype of a particular stock.) But, let’s say you were thinking of selling your stocks today for $50 per share. This wouldn’t be a favorable option because the share price is lower than what you bought it for. Consulting a financial advisor beforehand would have been ideal, but rest assured that any savvy investor will likely tell you, “You only lose once you sell.”
Different stocks come with different levels of risk, and you need to be comfortable with potential ups and downs because the stock market is volatile. Marginal losses and gains are seen in market indexes daily, and from time to time, more dramatic price changes occur. So, no matter what the general sentiment is, do your homework and be comfortable with your level of risk.
Pay attention to global industries.
Investing in stocks from various sectors of the economy may be beneficial because each industry performs differently based on economic conditions. For instance, investing in a pharmaceutical company like Pfizer at the onset of the pandemic might have provided strong returns, as more than 5.5 billion people have received a Covid-19 vaccine. Alternatively, investing in an airline could have been a disaster during the pandemic, but it may have yielded strong returns now as the travel industry is recovering.
Timing the market is impossible, but investing in different industries can help you hedge against one another to mitigate your risk in the face of economic fluctuations. Similarly, keep in mind that you don’t have to limit yourself to domestic stocks. In the same way that certain industries can perform better than others at times, the same concept applies to international markets.
In essence, you can consider investing in international companies or exchange-traded funds that provide exposure to global markets, as this can help you benefit from diverse economies and reduce the impact of country-specific risks. Furthermore, investors can also consider diversifying across company sizes; large-cap, mid-cap and small-cap stocks have varying growth potential and risk profiles, and a mix of these may help provide balance.
Think long-term growth.
It’s important to determine how much you’re willing to lose when diversifying your stock portfolio across multiple companies, regions and sectors. This is because diversification doesn’t eliminate risk, though it can help manage and reduce it. Your specific approach to diversification will depend on your individual financial goals, risk management, investment timeline and other factors that this article can’t comprehensively cover.
Nonetheless, I hope you feel a little more confident in your stock-investing abilities. If not, I would strongly recommend speaking with a qualified professional who can regularly review and adjust your portfolio as your circumstances change. At the end of the day, understand how much you can afford to invest, and keep a long-term growth mindset so that you can start building a portfolio that yields Jack Dorsey-like returns.
And remember, as Warren Buffet is known to have said, “Price is what you pay; value is what you get.”
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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