Diversification refers to creating a mix of investments distribution to minimize the risk of losing its values when it is at risk and to prevent putting it all in one classification of investment only.

What is Diversification?

It came from the famous notion or saying that to protect your investments “do not put all your eggs in one basket, if the basket falls, all the eggs will break”.

The risk would be too high if you only put your investment in one asset class because if something happens you will have a hard time recouping any losses incurred. Investing has risk so the only way to minimize it is distributing the risk.

Good diversification means selection also of assets or investments that would react differently form changing movement of the economy.

If your focus is investing on stocks only, you can diversify your holdings by investing in the stocks located within the 7 indices of the market. You can select stocks for each of the Finance, Industrial, Holdings, Property, Services and Mining sector of the market.

Under each of these indices contains several stocks as well (yellow shaded)

For the example below, these are the major stocks under the holding index.  To have diversification select only a few and don’t buy all the stocks under the Holding index. You can do the same strategy if you like property or the finance sector.

There are cases of different category of stocks even though they have different sector, for  example, Ayala Stocks (ALI, ALLHC, ACEN)  can all be hit together if there is a bad news related to its owners, although they came from different index sector. You need to look into these details as well and try to diversify by investing only in one or several of these stocks.

What are the examples of Investment assets?

There are different forms of investing vehicles that we can put our money to be able to grow it over  time. Below are example of assets we can invest into and diversification on this class of assets means allocating a certain percentage on each type.

Stocks – These represents shares or portion of a publicly traded company. Companies issue them in exchange to raise money, and the shares are then traded (buy or sell) based on its potential. For us in the Philippines, we are most familiar with these class of asset together with Mutual funds.

Bonds – are units of corporate debt issued by companies and securitized as tradeable assets

Mutual Funds and ETFs– Both types of funds consist of a mix of many different assets and represent a popular way for investors to diversify. ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day

Options – financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date

Annuities – a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future

Real State – private property in the form of buildings and land. Real estate can be used for residential, commercial, or industrial purposes, and includes any resources on the land such as water or minerals.

Is Diversification good for investing?

Diversification does not guarantee consistent winning when investing in the stock market, but since it distributes our investments on different types of assets it will improve our risk management, we will improve potential returns and achieve stable results over time.

When is Diversification not good?

The market conditions can vary from time to time. When investments are put in assets that have good fundamentals, overtime that asset will grow in value hence improving our income form investments. But when the market condition is not good, it will be hard to manage if there are too many stocks on a portfolio.

  • There are however times that no matter how you diversify your portfolio of investments you will still lose your money. This includes severe conditions like war, bear markets, high inflation.
  • Too much diversification will also give below average returns. For example if you have 100k for your initial investment and you decided to buy 50 different stocks you will only have 2k investment for each of the stocks. If it happens that 1 or 2 stocks gained at least 50%, you will only earn 1k for each of the stocks that hit the correct movement of the stock.
  • You will lose focus on the portfolio management. I came to realize this one time when I had 10 stocks with a 100k portfolio, when the market condition is not good, all of the 10 stocks will fall down, later on, I could not select properly which stock will be my priority for cutting loses. In the end, I ended up holding all of the 10 stocks with big losses.

The photo below is an example of over-diversification as majority of the listed stocks are bought. When the market turns bearish, the owner will have a hard time managing the portfolio.

Overly diversified portfolio

How many Stocks Should I hold to properly diversify my Investment but maximize returns?

Most investing books I found suggests 10-20 stocks for a regular investor.

For my case since I have been mostly trading stocks, I have a rough estimation on the number of stocks I would hold which depends on capital.

Again, these estimates are based from my experience and it may vary for each individual with different risk appetite. My consideration also includes ease of management and execution in times of negative market sentiment.

For less than 100K capital I maintain 2-3 stocks only. You can do a reverse calculation on the risk that you want to exposed. At this rate I have a risk appetite of 10-15% for each stock.

For 1M-3M capital, I maintain 6-10 stocks. Each with the same risk as above.

For 5M-10M capital, I maintain 10-15 stocks while for >10M capital I maintain 15-25 stocks.

Again, you should practice your risk appetite whether you are able to maintain it at these numbers. It takes time to develop and with the right practice, you can control your emotions during the time you need to make decisions on your investments.

Overall with proper diversification on investment, we can get protected from the market volatility overtime.

S&P 500 Index pertains to the Standard and Poor’s 500 in United States and it monitors the 500 publicly listed domestic companies. It represents as a whole the best overall performance of American US stocks.

Technically it accounts for 80% of the equity value of the US Stock Market. Just like the PSE Blue chip index, each stock member of S&P is given a weight, so largest stocks in market capitalization have bigger impact on the index performance.  

The highlighted S&P500 below is one of the major indexes being monitored in the Yahoo Finance section. Together with Dow jones industrial average and Nasdaq Composite index this is regulary monitored in financial sectors of the US market.

Why is the S&P 500 index important?

Since S&P represents a major number of US stocks listed in the market, it is a good gauge or benchmark for the overall performance of the US market.

Is S&P 500 index fund a good investment?

It is representing the whole US economy, so it is a good form of stock investment. And since majority of the stocks are listed on the index, it resembles a diversified form of stock investing in a single purchase. You do not have to buy or analyze individual stock just to find the best of them.

What are the Stocks that makes up the S&P 500

The 10 biggest stocks in the US market represents 29% of the whole market value. So it is a must for investors on the market to know who are the most valued of them that are included to easily monitor the index performance. Here are the top 30 S&P 500 stocks together with the weight values on the index.

#CompanySymbolWeight
1Apple Inc.AAPL6.602835
2Microsoft CorporationMSFT5.832072
3Amazon.com Inc.AMZN3.011482
4Alphabet Inc. Class AGOOGL1.958454
5Tesla IncTSLA1.816734
6Alphabet Inc. Class CGOOG1.813197
7Berkshire Hathaway Inc. Class BBRK.B1.656237
8Johnson & JohnsonJNJ1.353119
9UnitedHealth Group IncorporatedUNH1.339581
10NVIDIA CorporationNVDA1.335994
11Meta Platforms Inc. Class AFB1.280123
12Exxon Mobil CorporationXOM1.163083
13JPMorgan Chase & Co.JPM1.118301
14Procter & Gamble CompanyPG1.014435
15Visa Inc. Class AV1.006966
16Chevron CorporationCVX0.96411
17Home Depot Inc.HD0.905275
18Mastercard Incorporated Class AMA0.884437
19Pfizer Inc.PFE0.852491
20Bank of America CorpBAC0.757213
21AbbVie Inc.ABBV0.74604
22Eli Lilly and CompanyLLY0.712634
23Coca-Cola CompanyKO0.705538
24Broadcom Inc.AVGO0.685873
25Merck & Co. Inc.MRK0.665664
26PepsiCo Inc.PEP0.664546
27Thermo Fisher Scientific Inc.TMO0.640429
28Verizon Communications Inc.VZ0.616558
29Abbott LaboratoriesABT0.594754
30Costco Wholesale CorporationCOST0.591991

10 Best Companies of S&P500

1. Apple is a major producer of products notably in the sofware and hardware industry, which is usuable by the consumer market. Its most prominent product is the Apple iPhone brand, but Apple also produces other brands including Mac computers and iPad tablets. It also operates the Apple Music and Apple TV media distribution platforms. It is once the mostly valued company in the world after TESLA overtaking it on the list.

2. Microsoft is a computer hardware and software company that makes products for both personal and enterprise use. A major player in the tech industry for decades, Microsoft is best known for its Windows operating system, the Microsoft Office suite of programs, and the Xbox game system. The company also is a major player in cloud computing services with its cloud platform, Azure.

3. Amazon is an online retailer of all kinds of goods but has increasingly diversified its business. It also has a major cloud-computing business known as Amazon Web Services (AWS) and runs the Whole Foods chain of brick-and-mortar grocery stores. Founder and long-time CEO Jeff Bezos stepped down as CEO of the company on July 5, 2021, to become executive chair of the company. He was replaced by Andrew Jassey, who previously served as CEO of AWS

4. Tesla is primarily a maker of electric cars. It makes more than 90% of its revenue and virtually all of its profit from its car business, but it also sells solar panels and batteries for homes and businesses.

5. Alphabet is the parent company of search-engine giant Google. Among its other products besides the Google search engine, Alphabet runs video-sharing site YouTube. It’s notable that the company splits its stock into two main share classes. Google’s C shares are nonvoting shares, meaning they do not entitle the holder to participate in proxy votes. The A shares usually trade for slightly more than the C shares and carry voting rights. Each of these shares trades on the S&P 500, and each is large enough, by itself, to make the top 10 list. If the two share classes were counted together, it would place Alphabet fourth on this list and would make up roughly 4.2% of the index. There are also B shares, which have disproportionate voting rights and are only held by Google insiders. The B shares do not trade on the open market.

6. Nvidia is a company that develops and manufacturers Graphics Processing Units (GPUs). GPUs are a type of computer chip used for creating computer graphics, usually for visual design or computer gaming. However GPUs are increasingly in demand for other tasks such as cryptocurrency mining and artificial intelligence (AI) and machine learning development. Nvidia is known for its GeForce brand of consumer GPU’s.

7. Berkshire Hathaway is a holding company for the various investments CEO Warren Buffett has made over the years. Among its numerous holdings are insurance businesses such as GEICO, large energy and utilities businesses, a major railroad, consumer brands such as ice cream chain Dairy Queen, and manufacturers such as aerospace parts manufacturer Precision Castparts Corp. It also owns an enormous portfolio of equities.

8. Meta Platforms, previously Facebook, runs the largest, most dominant social networking platform in the world. It also owns photo-sharing app Instagram, messenger app WhatsApp, and virtual reality equipment maker Oculus.

9. UnitedHealth Group is a health insurance and as a pharmacy benefit management (PBM) corporation. It operates its PBM as well as addition healthcare services such as health-related data analytics under its Optum brand.

10. Johnson & Johnson (J&J) is an American multinational corporation founded in 1886 that develops medical devices, pharmaceuticals, and consumer packaged goods. Its common stock is a component of the Dow Jones Industrial Average and the company is ranked No. 36 on the 2021 Fortune 500 list of the largest United States corporations by total revenue

What is the average return of S&P 500

For the past performances of the index, it has produced in average roughly 10%. This does not mean that it will have the same return of 10% per month, the value is fluctuating some years it produce more than 26% and other years it produce a negative return, so remember to diversify your investments to avoid a full allocation risk.

Can we invest in S&P 500?

Anyone can invest on the S&P 500. Through CFDs, you can buy partial shares of the index. There are several ETFs with whom we can buy from and there are many platforms we use such as eTORO or XM Trading.

The most common of this in eToro platform is SPDR SPY (SPDR S&P 500 ETF), or in Vanguard VOO (Vanguard S&P 500 ETF)

You can also do buying on the opposite trend of the market (the opposite of buying long) on ETFs available in eTORO platform such as the SPXU (ProShares UltraPro Short S&P500)

How to Open XM Trading Account

Attached is a video tutorial for Pinoys to understand how to open an account to be able to invest on the S&P500 index.

You can open an XM trading account through this link: https://clicks.pipaffiliates.com/c?c=610128&l=en&p=1

How to Open eTORO account

For eToro, you need to open an account as well and select SPDR SPY (SPDR S&P 500 ETF), or in Vanguard VOO (Vanguard S&P 500 ETF)

One you have funded your account go to the search portion of eToro and type S&P500, several choices will then be prompted, select the option you prefer. Remember to invest only the amount allocated for investing purposes and set your stop loss and take profits area.

eToro SPY