4.Portfolio diversification

Diversion is a very old and popular investment strategy, applied to reduce portfolio risk. Actually, before you start investing in equities, you should consider various factors like your age, monetary requirements, etc, to determine how much risk you can take on. For instance, if you are around 30 years old, you can invest a greater portion of your portfolio in equities than a retired person. Once you have determined how much risk you can take on and how much you can invest regularly in equities, try to achieve diversification in your portfolio. To reduce risk, diversify within equities by investing across sectors. Do not invest in one or two sectors or any negative development pertaining to those sectors could severely impact the profitability of your portfolio. Secondly, ensure a good blend of small, mid and large-cap stocks in your portfolio. While large cap stocks would lend stability to your portfolio, small and mid cap stocks would give you an above average appreciation. Basically, growth potentials are higher in the case of small and mid cap stocks. Thus, just having large cap stocks could be safe but also mean that returns are just about at the same level as market returns. Thirdly, invest across value and growth stocks. Growth stocks are risky but also offer higher returns while value stocks are likely to be less volatile. In brief, when you spread your investments over a larger number of stocks and sectors, if a few stocks/sectors under-perform, this is compensated by other stocks/sectors which perform well.