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Portfolio Diversification - How to Make Your Money Work For You

It is difficult to build something without having a solid foundation to work on. Choosing to build a home atop a sink hole is as apt to failure as building a town without a fire station. In order to move on to bigger and better things, you must first make sure that what you've already worked on is sturdy on its own. The same goes with your stock portfolio. If you want to invest effectively, you have to start on the right foot. This is why it's important to start off with a diversified portfolio.

Invest for Yourself

Not all of us have time to become billionaires off the stock market. And that's fine. But that doesn't mean it's impossible to create a portfolio which will work for you on a lesser but equally effective level. One thing you should remember when starting a portfolio is to not overextend yourself. You can't purchase a bunch of stocks and let them loose into the wild. A good investor keeps track of his or her portfolio to determine if he / she should consider selling a stock. If you have ten or fifteen stocks to follow, though, the process can be overwhelming, and stocks that need attention paid to can often be neglected. Stick with somewhere along the lines of five stocks when starting.

Invest in Different Industries

Diversification does not mean having more than one company's stock. Think of your portfolio as a little financial ecosystem, a bunch of different things working and interacting with each other to thrive in their environment. If you want a diversified portfolio, it is important to invest in different industries. Don't buy five different stocks all having to do with agriculture; instead, find a stock in another industry like electronics, and another one in something like automobile manufacturing. This also helps protect your investments. If one industry is suffering, then one of your stocks in another industry could help cancel out any losses with its gains.

Invest in Different Types of Investments

While stocks can become a valuable investment, they can also be volatile and risky. It's a good idea to throw some of your money into some more consistent and safer investments alongside any stocks. Investments such as bonds and real estate should also be looked into. In the end, the important thing to remember is by diversifying your portfolio, you are not throwing all of your eggs into one basket.

With a solid and diversified portfolio, you can establish a steady source of extra income, or even use it as the basis of even more investments. But the important thing before making any big steps is to be comfortable and confident with what you've started first. Portfolio diversification is the first step to building a successful investment that works for you.

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Submitted by Tom Simmons at

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