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Creating A Diversified Portfolio To Minimise Your Risks
Education | 30 December 2011
By: Choo Hao Xiang
Articles (151) Profile
By: Ong Qiuying
Articles (131) Profile

In this current uncertain outlook, diversification is more important than ever in the portfolio construction process. Diversification should be done not just across sectors but also based on the size of the market capitalisation as well as the different kinds of geographical regions the companies are exposed to. Similarly pertinent is the classification of your stock picks into categories such as high growth and low volatility components. Subsequently, in order to account for your risk profile, ensure the mix of stocks is strategically overweight in the right sectors.

Guidelines: How to construct a diversified portfolio?

  1. Gauge your risk tolerance
  2. Choose a mix of stocks to fit your profile based on:

    1. Size/Market Capitalisation
    2. Industries/Sectors
    3. Geographical Exposure
  3. Weigh your portfolio according to your risk profile based on stocks that are:

    1. Low Volatility/Stable
      Stocks that shield us from market swings as they tend to remain defensive throughout various phases of the business cycle. These companies are large, have a strong balance sheet and pays out stable dividends.
    2. High Yielding
      Stocks that pay out a huge proportion of their profits, so investors can ride out any volatility through dividend yields.
    3. High Growth Potential
      Companies that operate in sectors or markets with good prospects for expansion. They tend to yield a higher return on equity and investors will be able to ride on the capital gains.
  4. Rebalance strategically if needed

Striding into the New Year armed with these fundamentals, now is probably an opportune time for investors to reorganise their portfolios. Join Shares Investment in uncovering a portfolio of promising stocks you can consider when diversifying your portfolio.

Find out more in our upcoming issue 425!

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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