In conjunction with a how to on buying stocks a DIY stock investor should have a plan for managing their stock portfolio. The most popular plan is to own a diverse selection of stocks. This can limit the risk of loss during a season or event. A diverse stock portfolio commonly refers to diversification by business sectors or industries. However, here are four types of diverse stock portfolios that can manage the risk to reward ratio.
In the past two years the price of oil per barrel has drastically declined. A sector/industry that took that very hard was the Master Limited Partnerships (MLPs) such as Breitburn Energy Partners. This MLP focused upon mid-stream assets in oil and liquid natural gas. Breitburn and many like them eventually filed for bankruptcy and were delisted from the major stock exchanges.
In a relational contrast, the airline industry did very well. Two good examples of outperforming stocks were Alaska Air Group, Inc. (NYSE: ALK) and Virgin America, Inc. Alaska Air Group eventually bought out Virgin America after it had only been a publicly traded company for about two years.
If a portfolio was diversified with the oil/MLP sector and the airline sector there would be some management options. One option would have been to sell the MLP shares at a stop loss of 10% and to hold the airline stocks long term to offset the loss and ultimately gain for the portfolio.
Selecting stocks based on sector alone doesn't guarantee a diversified stock portfolio. Take these two "wearable" stocks for example. Fitbit, Inc. (NYSE: FIT) is listed in the technology sector. A similar company, GoPro, Inc. (NASDAQ: GPRO) is referred to as consumer goods. There is some overlap in how these two business operate. Both are used by sports enthusiasts, rely upon discretionary income and have a fragmented market with multiple competitors. They are wearables and require some brand loyalty. Their IPOs had hype or momentum with huge price per share (PPS) swings. If an investor were to diversify by sector they might still buy both of these stocks, but still have compounding risk due to how similar they are.
A tool for selecting a diversified stock portfolio by sector is a FinViz map. The following is the "Standard and Poor's 500 index stocks categorized by sectors and industries. Size represents market cap." If you go to the site, the mouse hover will provide more information for an interactive stock picking tool.
Since selecting a diversified stock portfolio can be difficult, a DIY stock investor can analyze Insider or Pro examples. TipRanks offers a look at Hot Stocks By Insiders and further review of stock picks.
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An investor can diversify across types of stock performance. A value stock is an equity bought at low p/e, price to book, or enterprise value metrics. A momentum stock can have no earnings due to extensive expenditures, but the revenue grows quickly from quarter to quarter, and the market creates a demand for the stock. Examples of momentum stocks are Netflix, Inc. (NASDAQ: NFLX) and Amazon.com, Inc. (NASDAQ: AMZN). An income stock, also known as dividend stock, is an equity that typically pays the shareholder a dividend each quarter. On May 2, 2017 when auto stocks took another hit in PPS, Ford Motor Company (NYSE: F) had an attractive dividend yield of 5.25%.
In the same way the sectors may respond to economic events so to will the sentiment of the investing world and what they "feel" is a safer type of investment. During uncertainties, a preference may grow for value stocks, while momentum stocks go through a large sell-off. A diverse stock portfolio can consist of value stocks, momentum and dividend income stocks.
Some stocks and the investing opportunity can't be properly classified by sector alone. The Federal National Mortgage Association, aka, Fannie Mae (OTC: FNMA) is a bank/finance equity that has been affected by a legal and political anomaly. The earnings have been under an illegal net worth sweep giving shareholders an expectation that only an executive order or court ruling will cause stock price to rightfully recover. If an investor disciplined themselves to own just one financial stock, they might miss out on this opportunity of a legal dispute. Watch the latest Fox News interview with U.S. Treasury Secretary Steven Mnuchin: Obama Admin Took GSE Money for Healthcare.
An emerging trend such as virtual reality (VR) can be categorized under the technology or consumer goods sector. If an investor owned Fitbit, Inc. a position in the same sector for Facebook, Inc. (NASDAQ: FB) might still be a diverse position. This is because Facebook, Inc. is not the same business type as a fitness tracking company. In addition to being a social network and ad revenue generating search application, Facebook, Inc. owns Oculus VR. Thus, owning Facebook is also owing part of the VR stock emerging trend.
Disclosure: I am/we are long F, GPRO, FNMA.