Diversifying your investment is a proven method to manage risk in stock dividend investing. The fundamental concept behind this investment strategy is the theory that diversifying stocks in a portfolio can reduce the risk and can yield higher profits in the long run.
Diversifying your investment portfolio may mitigate the unsystematic risk events so the stocks that are performing well can counter the bad performance of other stocks. The advantages of diversification are often realized only if the stocks are not related with each other or are from different sectors.
If you pour all your investment capital in one industry or sector, you are putting yourself at great risk. Stay away from this practice despite the promise of high returns. Even if you make some profits, they will be quite different as opposed to market performance.
Dividend investing is not exempted from market volatility. No one can surely know what will happen in the future, so it is not ideal to invest all your money in just one company or one sector.
Do you still remember the case of Enron? What about Lehman Brothers? Putting all your eggs in one basket can lead to disaster.
Let’s say you decided to buy stocks from companies coming from different sectors. Even if one or two sectors are struggling, other sectors might be doing well. Hence, your portfolio will still grow.
You should avoid relying on one sector to grow your capital and receive dividend payouts. Your portfolio should be capable of sustaining unforeseen events because it is diversified.
As long as the stock market is there and companies are actively operating their businesses, there is no reason for your diversified portfolio to lose its value. Over the years, the stock market has been following an upward trend, but there are no indicators that this will go south anytime soon.
A well-balanced and diversified investment portfolio can help you distribute the risk and achieve your investment objectives. Building your portfolio starts with an understanding of the fundamental risk factors, which could affect the profitability and volatility of your dividend investments.