Diluting your portfolio

In financial management, when we talk as much about not having all the eggs in the same basket, it is also important to understand why we should not be diluting our portfolio too much. In some of my past articles, I would have mentioned about the importance of diversifying the portfolio. It is one of the best ways to get good gains and returns from the share investments. Having all your investments on one particular share or investment plan is not a great idea. If something goes wrong, you will be locked up and sometimes you might have to wait for a long time to recover from the loss. There will also be situations where you will not have options to recover at all.

So, diversifying your portfolio and investing in different investment plans and stocks is always good. But at the same time, one should understand the limit for it. You cannot straight away dilute everything and invest only a little on each investment schemes. If you do so, you will not be able to get proper gains from that. Not all the investment schemes guarantee a great return in the short term. Some can give a return in the long term and some can only guarantee your principal. So, in such cases investing on the right plans is very important in financial management.

Extent to which dilution can be done

When you are planning to break your investments into small bits to invest in multiple things instead of just one stock alone, then you have to first calculate which will be profitable. There is no use in buying just only one stock or a few stocks of a company just for the purpose of diversification. The reason is that if a stock grows even 100 per cent in a few years, it will not be of great benefit for you. Say for example, if you buy 10 stocks that are 20 cents. Say if it grows to 1 $ in one year or two years, it is not going to give you great ROI. When you are calculating the ROI, along with the value that you are investing, it is also important to choose the correct quantity to invest.

Having 100 stocks just to diversify the portfolio is not a great idea compared to just having 2 stocks that are solid. The ground rule of not having all the eggs in the same basket should be applied at the right time. I wanted to write an article on this topic because one of my friends was really afraid to start trading in the share market. But somehow he convinced himself to start trading. Though I gave him advice on certain stocks, his choices were really very different and the investment that he has made now is not going to give him any gains even after 10 years because he has invested on so many stocks but the quantity he has purchased is very poor. Even if we take it collectively, it is not going to provide a great return.

Having liquid funds

When you allocate and plan about investing in different types of stocks, you should also plan about having some liquid funds in hand. The liquid funds not only help us during emergencies but it also helps us in doing the right investment at the right time. When the whole market is falling down and you still see a great hope on some of the stocks, you should not be stuck in a situation where all your funds are locked as investments on other stocks. Market fall is sometimes a great opportunity to grab some profit. Of course, you should also be knowing when to enter and when to exit.

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