Aloha and Happy Tuesday! Today’s newsletter is coming to you from the beautiful shores of Maui, where I’ve been catching waves and drinking a lot of POG (if you know, you know).
Something about spending so much time on the beach has me thinking about balance, so today we are talking about the wonders of portfolio diversification; the investing approach that helps me relax about putting my phone in airplane mode taking a few days off from watching the markets.
On a separate note, does anyone know where to find the best fish tacos on Maui? I'd love to hear all your rec's and fav spots on the island! 🌺
📰 In the Headlines
Breaking down this week's biggest financial news stories
Translation: Amazon is going to war with Walmart
In the battle for e-commerce domination, Amazon just brought out their Queen. A new section will let people order medication called Amazon Pharmacy. You’ll be able to pay using health insurance, or get discounts on generic and brand-name drugs through their partnership with about 50,000 pharmacies. This move into prescription drugs helps Amazon compete with Walmart, who just launched their own e-commerce service, Walmart+ in September.
Translation: Home Depot thinks the housing boom is not going to slow down any time soon
When the pandemic first hit the US, many companies implemented ‘hero pay’ or increased benefits for their employees who still needed to go into work, but have since removed them. Home Depot announced this week that they plan to make those pay increases permanent because the pandemic has been good for business, reporting a 24% increase in profits, and they don’t think the interest in renovations will be slowing down any time soon.
Translation: All your Amazon deliveries are making recycling more profitable
Historically, the US relied heavily on selling our recyclables to China in order to help keep our landfills levels low. This has become a problem as our trade relationship with China has soured over the past few years, and pandemic constraints have tightened the market for recyclables even more. However, clean, sturdy cardboard is just the type of material that US paper mills were looking for. The increase of e-commerce delivery boxes in recycling bins have made it easier for recycling plants to turn a profit. If you want to learn more, NPR did a really interesting deep-dive into the American recycling industry that I highly recommend.
✨ The Value of Variety
Even though I really enjoy following business news and watching the markets, the idea of investing my hard earned money can still feel really scary. If you have wanted to start investing but are a bit nervous about the risks, there is a simple and effective investing tactic you can use—diversification.
The idea behind diversifying your portfolio is fairly simple: it’s making sure all your eggs are not in one basket. Your ‘portfolio’ is just a finance term for the list of all your investments. By spreading out your money among different types of companies and assets, you’ll have some security if the market takes an unexpected turn.
3 Tips for Creating & Maintaining Diversified Portfolio
💸 Spread Your Wealth
Don't put all of your money in one stock or one sector. If you usually tend to invest in one type of company, do some research on sectors that are completely unrelated to it. It’s always best to have your money in a handful of companies you understand, trust, and even use in your day-to-day life.
⚖️ Keep It Balanced
Look for a few stocks or assets that have low or negative correlations to the majority of your other stocks. If one moves down the other tends to counteract it. Investing in other securities, like EFT’s, precious metals, and mutual funds, are easy ways to select asset classes that will diversify your portfolio.
👀 Watch Out
Just because you have diversified your portfolio, doesn’t mean you can take your eyes off the market. Your portfolio should be always evolving and shifting because what you are invested in is always changing.
How Diverse Should You Go?
There is such a thing as being too diverse. If all your investments are counterbalancing each other, you reduce your likelihood of beating the market. Here are 3 questions you should ask yourself when deciding how diverse you want to be in your holdings.
What is your risk tolerance?
Are you the kind of person who jumps off the high dive, or do you prefer to take your time wading into the water? It's a good thing to know before choosing your investments. There is no reward without taking on a little risk, but if you like to play it safer, get started by making your portfolio more diverse.
What is your timeline?
Before you make an investment decision, it's important to know how long you plan to keep your money there. The types of investments you make will be very different if you plan to keep your money there for 6 months or 10 years.
How much are you watching?
Warren Buffet, the legendary investor and owner of Berkshire Hathaway called diversification ‘insurance against ignorance’. While we all try to be diligent and keep up with all the news affecting our investments. If you don’t have the time or skills to take deep dives into every investment choice, counterbalancing it could soften the blow if the investment falls if you are not able to divest as quickly as you would like.
The Bottom Line
Investing can be really fun, but it also can be scary and heart wrenching. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
Word of the Day
(n.) How long an investor plans to be invested into a stock or security for. How short or long your ‘investment horizon’ is may affect what you end up investing in.
Ex: John likes to work with a 5 year investment horizon, so when he buys a stock, he plans to own it for about 5 years.
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