Concentrated stock portfolios are an absolute no-no for investors. Portfolios focusing on only one kind of investment are considered risky. For instance, suppose banks have been performing well for the last few quarters; you invest majorly in financial service companies. However, after the budget announcement, there is a dramatic fall in their share prices.
Imagine the chaotic status of your portfolio. Hence, spread out your funds thoughtfully. The best technique is to follow the 5% rule. Experts opine that no sector should hold more than 5% weightage in your portfolio. Following this rule will help you achieve equal distribution, hence curating a diverse portfolio.
But how do you choose the stocks properly? Check out how different stock research techniques can help you build a desirable portfolio. Read along to know more.
Stock Market Research Techniques For Portfolio Diversification
Research is the secret to success. Hence, ensure you use efficient stock market research for accurate results. However, this is not only about basic market research. Instead, it is more about tactfully conducting the process to create a balanced portfolio. Here, we will study the five common tips.
- Correlating Stocks
Stocks with correlation quotient values will offer you the most stable diversification. If two stocks have a 1.0 quotient, it indicates that they will move in the same direction during market fluctuations.
However, you must choose assets with negative correlation quotients, i.e. -1.0, which indicates that they will move in opposite directions when the market swings. This will help maintain a balance during both profits and losses.
- Varied Investments
Stock markets are not limited to stock investments only. Rather, you can invest in commodities, government bonds, ETFs, real estate, etc. However, you must consider multiple factors in your research before investing.
One common trick followed by experts here is that your age should be your percentage of investment in bonds. The difference in your age from 100 should be your investment in stocks. Hence, spreading your funds to assets other than stocks is necessary to minimise risk.
- Asses Qualitative Risks
Another aspect to include in your market research is qualitative risks. While reviewing a share, you must consider the potential risks the stock can face in the future. The best stock research technique is conducting a SWOT analysis. This will provide you with comprehensive qualitative information about the stock.
For instance, you may be looking through a bank stock to invest. However, proper research shows that some internal conflicts are occurring, which is a potential risk. In such instances, refrain from investing in that company for now.
- Balanced Market Capitalisation
It is expected to leave penny stocks and conduct only top stock research. However, various professionals believe this is the incorrect way to build a portfolio. Rather, there should be a proper balance of capital stocks.
Low-cap stocks are usually more volatile. Hence, they help you to gain immediate profits from sudden outbreaks. However, you must research extensively before including low-cap stocks in your portfolio. For improved decision-making, both quantitative and qualitative analyses must be carried out.
- Long-term Stocks
Investing in long-term stocks is essential for both youngsters and aged investors. Stock market investments are a kind of financial security that ensures you are not only thinking short-term. It must be a balanced and growth portfolio that will serve immediate and future goals.
Research stocks with a history of performing well in the long term. Allot at least 10% – 20% weightage to such shares. A simple tip: Choose companies with franchises or products in varied industries like Reliance Industries, P&G, etc. They are less likely to incur losses in long-term plans.
Wrapping Up
Diversification in portfolios is a must to minimise risk. However, before including any stock in your portfolio, ensure you have adequate information about its financial health and market condition. You can use an advanced tool like Motilal Oswal’s Research 360 to get valuable insights on various companies.