FTSE 100 shares are often thought to be akin to the US blue-chip stocks – resilient companies with strong brands and long-term business prospects. However, even when I look at the Footsie for potential opportunities, I keep in mind one thing: diversification. This is, in my view, the best defence against the chance of losing money.
Why diversify?
About four years ago, I lost close to £10,000 by investing in a single investment vehicle – a trust. A trust is a pooled, close-ended investment product that is listed on a stock exchange, which raises funds from investors to allocate into a number of companies. Despite the fact that this particular trust was invested in over 100 companies, I still lost all my money as it was all concentrated in a single product managed by one fund manager.
What I did wrong was to ignore the need to diversify or, as Warren Buffett once said, “not to put all my eggs in one basket”. Consequently, with the stock screener in front of me, looking through the FTSE 100 for shares that offer great long-term potential for a good price (value for money remains a key consideration!), I keep in mind the need to diversify.
In simple terms, diversification is the mitigation of market risk by spreading that risk accordingly. Applying this lens to the FTSE 100 universe, I spotted the following ways I could diversify my portfolio with Footsie stocks.
Diversifying my portfolio with FTSE 100 shares
First, I can diversify by buying shares in companies that operate in different sectors. What sectors exactly make up the FTSE 100 depends on what businesses reach the index, and this can differ across specific time frames. Right now, there are 11 sectors, including consumer staples, financials, industrials, materials and healthcare.
Some of these industries are more cyclical than others, each presenting a different business case for the long term. Therefore, looking to buy attractively valued shares in FTSE 100 shares across different sectors can act as a diversifier, in my view.
Secondly, I want to buy shares in companies that operate in different parts of the world, as not all economies are the same and some will fare better than others. For example, SSE and Tesco are UK-focused businesses while Unilever and Shell are more internationally focused.
Finally, I am looking to buy both an index fund that tracks the performance of the FTSE 100 index, thereby gaining exposure to the overall price movement of its constituents, as well as an actively managed product by a fund manager in whose investment vision and strategy I believe.
Therefore, even when looking at solid FTSE 100 shares, I always seek a way to diversify (reduce) the risk in my portfolio in order to mitigate the chances of losing my hard-earned savings.
