You’d be crazy to think that all 15 billionaires tracked by iBillionaire have a completely different strategy for investing. While they all do certainly have different focuses, what is the one thread that ties them all together? What is the one thing that all 15 highly successful billionaires have in common?
The answer is: diversification!
What is diversification, you might ask?
For those in the investing world, diversification is a risk management technique that many of the smartest minds employ to protect their assets. The idea is that instead of placing all your eggs in one basket, one should instead make a portfolio that mixes a wide variety of investments.
The rationale behind diversification is simple: a portfolio that is a mix of different kinds of investments will return higher yields, on average, AND will be less risky when compared to a portfolio consisting of just one investment type.
If you hold just one stock or a very small number of stocks, the failure of a single company can be a huge financial disaster. But if your eggs are nestled in many baskets, you are much more likely to be able to withstand the sudden shocks of rapid market fluctuations.
Let’s take a look at Warren Buffett’s Berkshire Hathaway portfolio as an example.
The biggest holding of any one particular stock that Buffett owns is the Heinz Kraft Company (as of March 2017). Even though Heinz Kraft makes up the biggest portion of the portfolio, this stock only actually represents 18.27% of the total portfolio value. This holding of 18.27% is actually very high relative to Buffett’s other investments; the average weight of each individual stock is just over 2% of the total portfolio.
Here is a look at the top 10 holdings of Warren Buffett’s Berkshire Hathaway:
With a portfolio value of 162B, Buffett owns 46 different stocks. In fact, if you take a closer look at the stocks owned by him, we can see that not only does Buffett diversify across different stocks, he also invests across a variety of different industries. Buffett’s portfolio is a colorful mix of many different sectors which shows further evidence of his diversification tactics. (Source: ibillionaire.me)
The Different Ways to Diversify
We’ve already seen a couple of examples of ways to diversify, but are there any others?
Here’s a quick look at some of the many ways to diversify:
By company: e.g. Apple, Google, Facebook and Twitter. Perhaps the most obvious way to diversify but one that should not to be underrated. Simply investing in a number of different companies (whether in the same industry or not) can be a great way to add a little diversity into your portfolio.
By sector: g. energy, financials, health and telecommunications. Investing in different sectors can really impact how susceptible you are to large fluctuations that may affect just one or two industries. Try opening up your portfolio to two or three new industries.
By asset class: e.g. bonds, stocks, cash, real estate and commodities. All of these perform differently in various economic environments. Bonds are generally seen as a fairly safe investment option and putting some money aside into bonds can be a much safer bet for the risk-averse.
By geography: e.g. U.S. markets, European markets and emerging markets. Although you may have a bias for your home country, don’t forget about international markets as well. Investing in international stocks gives you access to potentially high returns, as well as the exposure to markets that may move very differently to U.S. markets.
By size: e.g. large-cap, mid-cap and small-cap companies. Some of the larger companies like Apple, GE or Coca-Cola seem like more obvious investing choices but adding smaller stocks to your portfolio could prove to be a wise investing decision. Take a look to see if there are any smaller up-and-coming companies that catch your investing attention.
There you have it. The simple ways that you can get started on today to introduce some diversification into your portfolio. The billionaires are doing it so shouldn’t you be, too? Every single one of the billionaires on the iBillionaire platform employ a mix of different diversification techniques. From Warren Buffett to George Soros to Karl Icahn, you are never going to find a single stock portfolio.
Take some advice from the billionaires and diversify your holdings. It’s easy with iBillionaire, which has an exciting range of investing options available to you today!