Portfolio Diversification Is the Simplest Way to Lower Risk. Here's How I Build Mine.

My investment strategy revolves around selecting companies renowned for their consistent history of increasing dividends and boasting historically high yields. These attributes are scarce, and they occasionally appear in clusters within particular sectors. To manage risk, I consider diversification, which is one of the most straightforward and potent methods. I currently hold approximately 34 investments in my portfolio.

According to the Motley Fool, owning 50 stocks is a recommended benchmark. While this number is reasonable, it can also mean a significant amount of work. Moreover, merely possessing 50 stocks does not automatically equate to diversification. For instance, owning 50 stocks all confined to the technology sector would expose you to a single industry, which is not diversification. True diversification entails holding a reasonable number of investments across a broad spectrum of sectors and asset classes.

Diversification is about having a well-rounded mix of investments that spread risk across various sectors and types of assets. This approach ensures that even if one sector or asset class underperforms, the impact on your overall portfolio is minimized. By diversifying, investors can achieve a more stable and balanced investment portfolio, reducing the likelihood of significant losses due to sector-specific downturns or market volatility.