What is Diversification?

Diversification when it comes to your dividend portfolio is very important. Diversification in this case is the act of purchasing stocks and securities in different sectors and having different stocks within those sectors.

Being diverse in the market is important due to many reasons. First, if you only own 1 stock and that stock drops to $0 you lose 100% of your investment. On the other hand if you own 10 stocks you only lose 10% of your investment portfolio.

When dealing with sector diversification the same reasoning applies. If you only own one sector, consumer defensive for example, and a market changing event occurs that makes all stocks within that sector go down 50% you will lose 50% of your investment. If however you are diversified in 5 sectors, your investment portfolio will only go down 10%.

One great way to be diversified without having the hassle of tracking many stocks is to use ETFs as diversification tools. Since an ETF is a collection of stocks, you can use that property to be diversified in many stocks within a particular segment. Buying multiple ETFs that cover various segments keeps your portfolio sector diversified.

Our model portfolio aims to have no individual holdings over 5% and at least 5 sectors within it. You can see a sample diversified portfolio as visualised by our diversification tool below.

diversification chart

As you can see, ETFs account for a large amount of the portfolio (~48%), next is financial services (~18%) and so on. Our stock allocation diversification is slightly overweight in some places like JNJ and T but still outlines the diversification principle well.

The charts provided above are generated by our dividend tracking software. Register now!

As always - this post is not to be taken as financial advice. Please consult a financial advisor before making any financial decisions.