Diversification and Rebalancing

Diversification and rebalancing are very important parts of investing. In order to stay diversified, you need to rebalance.

Diversification means diversifying (or spreading out) your stocks across different sectors, asset classes, or more. Maybe you’ve heard of the saying: don’t put all of your eggs in one basket? Well, this especially applies to investing. I recommend staying away from individual stocks and sticking to ETFs because you get more diversification with them. If one of the companies in the S&P 500 ETF went out of business, your holdings would barely be affected. Even if fifty of the stocks in the S&P 500 ETF went out of business, it still wouldn’t be too big of a deal.

I recommend ETFs for any portfolio because they minimize the amount of risk while still keeping great returns.

Diversification is critical, so it’s important to maintain it. Rebalancing is how you do this. On a fixed schedule, you sell part of the winners and buy more of the losers. This is important because just because something is doing well now doesn’t mean it’ll always do well. Historically speaking, things that are doing very well now will at some point do very badly.