Welcome back to another episode of Ask Ash, where I interview WatchMojo Founder & CEO Ashkan Karbasfrooshan on various topics, such as what is going on in the news, to career advice for students & entrepreneurs.
Today I wanted to talk about diversifying your stock portfolio. I am just starting out in investing and had a lot of questions about how I should diversify my portfolio of stocks, and what to invest in. Here is Ash’s Take on the diversification of stock portfolios.
1. Are you diverse in your stock portfolio? Do you invest in one industry or multiple industries?
My anti portfolio article and current portfolio article cover this quite well… naturally I am trained in finance but have experience in media and tech, so I tend to focus on those sectors: media mainly, and technology. I also have a professionally managed portfolio by the pros which are very diverse and focuses on more conservative holdings, like banks, consumer cyclical, and so on.
For the investments I manage, In a nutshell, I would say:
a) invest in companies you understand.
b) back management that is not just competent but shows candor.
c) avoid the institutional imperative (i.e. herd mentality).
d) ultimately have a long-term outlook: buy the stock, forget about it. I am not a trader, but an investor.
2. For someone who wants to enter the stock market, do recommend buying mutual funds or ETFs?
Stick to what you know. It depends, if you have the time, interest, energy, and passion to follow individual companies, there’s nothing like making a decision to buy or sell a company stock… but if you don’t have that luxury, then indeed instruments like mutual funds and increasingly, index-based exchange funds are a very viable way to have exposure to equities.
But if you want to be a stock picker, figure out your risk profile and time horizon. I would also speak to a professional who is licensed to make such decisions to get a sense of how much – or how little – you know. Note I am not licensed to give advice and nothing here is advice… I am just explaining my perspective and modus operandi.
3. What would you say is a good amount of stocks to invest in if you are starting to invest?
The normal distribution suggests 15-30 yields a diversified portfolio, but that assumes the stocks are correlated in a proper way (i.e. if you invest in 10 banks, you are not diversified per se). The way I do it is I start with a company I know, but invest an amount I am OK losing in a worst-case scenario. Then as the stock goes up, you can sell a portion and use the proceeds to buy a 2nd, 3rd, and 4th stock, etc. Now of course, if the stock price goes down and you don’t want to sell and believe in the long-term fundamentals, you can also buy more shares at a lower price, to lower your average cost. But that presumes you have the time horizon and added capital. Ideally, follow stocks and track their performance before placing an order.