Few more Investment Options for Building a Well-Diversified Stock Portfolio

We discussed few basic stock types in my recent post. Today I will list few more options that you can consider while building a stock portfolio. As the old saying goes ‘don’t lay all eggs in the same basket’, it is important that you diversify in different classes of stocks, and then you should always have some exposure in bonds and fixed deposits. In this post I will talk about stocks. It entirely depends upon you to select the ratio for stock investments in your portfolio, but all I suggest is that you take a look at the options listed below before allocating money in stocks.

Key Advantages of Investing in Defensive Stocks

We have defensive stocks, which are one of the most favored types after the recent recession. Such stocks include companies catering to basic needs of masses such as power, utility, food etc. Businesses depending on basic human needs are considered safest as such needs don’t die out even in worst economic times. So, I recommend that every portfolio should have some allocation in defensive stocks as we can never predict what we may witness around the corner. These stocks may not appreciate much when compared to growth stocks and blue chip stocks, but these pay out stable dividends.

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Reaping Profits from Seasonal Stock Trends

Some companies target seasonal needs of consumers, so their sales tend to fluctuate with the demand. It’s difficult to invest in such companies as we cannot predict how the next season will pan out. This is the main reason why investors stay underinvested in such stocks. If you can time the trend, such stocks can reap handful returns in very short time frame. But I don’t recommend large exposure in such stocks as these carry much higher risks, and a wrong selection can impact your overall portfolio return.

 

Betting with Penny Stocks

A Penny stock, as you would know usually refers to stocks that trade lower than $5, and these are traded over the counter. These are not recommended for layman investors, as it requires in-depth knowledge in the field of finance to identify good quality penny stocks. If you have the experience and the capacity to take highest amount of risk, then penny stocks can simply make you wealthy.

Timing Investments in Cyclical Stocks

It’s not an easy play to time stocks, and when it comes to investing in cyclical stocks it gets even trickier. When earnings of a business move in tandem with the business cycle, its cyclical in nature. In an easy to prosper business environment cyclical companies tend to grow very fast and thus their stock prices rise with exuberance. And things move in similar fashion when the cycle turns down. Cyclical stocks are generally butchered hard when there is a recession or even a minor blip in economic activity. Sectors and stocks that fall in cyclical category are such as airlines, autos, steel etc.

 

Growth and Diversification with International Stocks

Investing in domestic markets is easier as we better understand local businesses and then they are considered safest. Investing in international equities on the other hand opens up new investment horizons. Internationally it’s much easier to identify very high growth businesses and this helps in improving portfolio returns. International investing is considered as a great way to curtail domestic risks as you can diversify your investments in different parts of the world. However, international investments are subject to much higher risks, manipulations and uncertainties, so it is advisable to keep international exposure limited to the need of diversifying domestic risks.
You can easily constitute a sound stock portfolio if you properly allocate your resources in above mentioned options along with those I mentioned in my last post( 3 Type of Stocks you must have in your Investment Portfolio ). I strongly recommend that you diversify across asset classes as relying completely on stock investments could be a riskier venture.

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