What Is the Best Diversification Method for Stock Investing? - Candlestick Patterns Explained by TechniTrader®

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Nearly every long-term investor wants to know about diversification for their portfolio. The classic “diversified portfolio” was not intended to be the best method to increase wealth for the individual investor portfolio. What it is designed to do is to protect an investor from catastrophic losses.

The theory goes that if one area of the market is collapsing, then a diversified portfolio will have some area that is performing well and the gains will offset the losses. The result is often a flat portfolio. It is for a frightened investor who worries more about losing money than making money.

The whole idea behind how to invest in stocks is to allow you to make profits in a non-earned income way. Let’s separate trading, which is a business that is earned income, from long-term investing.

Stock investing should provide a means for wealth accumulation, while trading provides a means for monthly income and living expenses.

Many traders try to use their trading activity to build wealth, and that is not the proper mode. Trading should be used to increase your capital base to a certain level and for monthly living expenses or whatever immediate cash needs you have. Your true wealth accumulation should come from your longer-term investments.

It is best to have two separate accounts: One for trading, the other for investing. Keep them entirely separate.

There will be times when a short-term trade turns into a stock for long-term investing. That is a rather ideal way to buy long-term because the risk is greatly reduced and you can often be in high profit before you ever turn the stock over to the long-term portfolio. In these instances, you can be very comfortable with the wide stop losses that long-term investing requires. Trading a stock toward a long-term hold is also a way to become familiar with a young company that is without much name brand status or recognition.

Diversification: Throw away everything you have heard and everything you know about diversification if you really want to make great profits with stock investing for the long term. The standard diversification was designed to comfort and console the uninformed investor who is really afraid of the market but is also anxious not to miss out. It is not the ideal portfolio or method. It is the safe method that works okay until a major Stock Market Crash like we had in 2000, but it fails miserably then and in the meantime gives meager profits.

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Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses