An informed investor will understand the need for proper diversification strategies within their investment portfolio. They will know that this is the only way to truly enhance their stock market returns while at the same time, minimize their risk. The stock market does not reward you for taking unusual risks. The best method to use with your investment strategy is to create a portfolio which gives you the best chance to make money.

In a study completed by Professors Alok Kumar and William Goetzmann, they found that the individual investor does not properly diversify their stock portfolio. In their study completed in the 90’s, the younger, less wealthy, and non-professional had the least diversified portfolios. About 25 percent of the funds held only one stock and about half of the portfolios held only one to two stocks. Those individuals who did try and diversify by purchasing multiple stocks were haphazard in their investment style. They did not attempt to find those stocks with minimal correlations. It appeared that they were merely following the herd. Going with what the crowd said was a winning stock pick appeared to be their investment strategy. It kind of reminds me of young children playing soccer. Instead of having a well thought out plan, the investor simply tries to follow the ball around the field with the other investors.

Make the decision right now to look at your investment portfolio. Find an asset allocation calculator or site that will help you to determine what stocks have low correlations. I have discussed asset correlations in other postings. One of these articles is entitled “stock-market-diversification-tactics”. This will give you some additional ideas on asset correlation tactics.

In your stock diversification strategy, you should invest across different asset classes. You should also diversify your different investments within each asset class, and across industries and sectors. You can check out the article entitled “strategies in picking winning stock sectors” or “which sectors are going to be the best investments for growth” for ideas on finding stock sectors to invest in. Both of these articles are on this site. Another diversification tactic is to maintain a form of liquidity. You do not want to be 100 percent invested in non-liquid investments and have a financial need arise, or find another investment you wish to take advantage of.

Your asset mix will also depend on your age and how soon you are to retirement. If you have taken the correct approach to diversifying your investment strategy, and taken advantage of all opportunities to invest for your retirement, you will be like an acquaintance of mine. He happily decided to leave the rat race and retired a few months ago. I would hope that each of us could be in that situation when the time comes.

Tags: diversification, investment strategy, minimal correlations, stock market returns