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Portfolio Diversification: What does that even mean?

(Image Source: Coustom Wealth) 

I am sure that most people have heard the phrase, “don’t put all your eggs in one basket,” this also goes for investing.  You should never put all your money into one stock unless you really feel that the company is great, and even then I wouldn’t do it.

One of the most important thing to note about the economy is that there are booms, bull markets, and recessions, bear markets. Here is the truth friends, it has happened many times in the past and IT WILL HAPPEN AGAIN. Systematic market declines will happen, but how do you hedge against this? Find companies that will do well in recessions, for example McDonalds (NYSE:MCD). Before the recession, MCD’s high was just above $62 a share and the low during the recession was just below $55 a share. This is just one example, I am sure you can find a bunch more.

Next, invest in safe assets. The number one safe asset in the world, you guessed it, U.S. Treasury bonds.  Treasury bonds give you a semi-annual coupon payment and guarantees the principal at maturity. Then you can go into more risky securities, a good way to spot risk is by using beta coefficients. The beta of a stock is how well the stock correlates with the overall market. A beta of 1 usually means that it moves with the markets. Beta over 1 means it will react more than the overall market (high risk) and a beta of below 1 is low risk. (less variability)

So with this knowledge, lets go beat the market.