Different Areas to Invest Stocks in to Diversify Your Portfolio

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You can diversify your stocks by investing them in a variety of different areas. Find out about the different areas to invest stocks in to diversify with help from a licensed insurance agent in this free video clip.

Part of the Video Series: Financial Planning
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Video Transcript

Hi, I'm Jonathan DeYoe, with DeYoe Wealth Management in Berkeley, California, and today we're gonna talk about different ways to diversify your stock portfolio. There are three primary categories we look at when we're gonna diversify a stock portfolio. The first is geography, second is capitalization and third is, we'll call it market maturity, and that's the growth verses value. First, let's look at geography. We've developed an entire set of names for the different geographic types of things we can invest in. The first thing we can invest in is called developed economies, and this is the ones we know and we are very familiar with, the U.S.'s the Germanys, the Frances, greater Europe, these are developed economies, just as the name sounds. The second is the emerging economies, and this can be China, Brazil, Russia, India, these are countries that are on the verge of being developed. And then finally we can look at frontier economies. This is smaller countries in South America, smaller countries in Asia, and these are countries, you know, much of Africa, that are undeveloped as of yet, but are beginning to show the signs of markets and business cycles etcetera. So one can invest in all three of these. Obviously, if you're investing in a frontier and the emerging, a lot more risk involved. In developed, developed economies and developed countries, you get a lot more stability, a lot more rule of law, and as countries develop the rule of law, principles of capital, and the ability to trade with their neighbors, they move more from frontier economies into emerging economies, and into developed economies. The second sort of broad spectrum categorization is capitalization. And this is the idea of investing in big companies verses little companies. Oftentimes we define big companies as these are large capitalization companies, and they are five billion dollar plus capitalizations. We look at medium sized companies, we look at from one billion to five billion capitalizations. And we look at small companies, we look at somewhere between 250 million and one billion capitalizations. And if you look below that, we get a category called micro cap companies. Now, what is capitalization? Capitalization is the number of shares outstanding times the price of the stock. So, that's how you can determine capitalization. An example of a large cap company would be a General Electric, or a General Motors, or a Ford. Perhaps an example of a small cap company would be Tootsie Roll. They do one product, they do it really well, but that's all that they do. They're a very small company. Third and finally we have the category, the broad spectrum category of growth verses value, what we call market maturity. When a company begins, and starts growing quickly, they have a lot of room for expansion into new geographic areas and new product areas. Oftentimes this company, a growth company, will take all of their profits and reinvest them into the company's growth. As the company matures, they start to instead of reinvesting that capital into growth, a they reach the bounds of their geographic environment, and as they have developed the logical product bases that they might offer, they start to pay that dividend out, that additional capital out in dividends, rather than reinvesting it into the company. So that's the growth verses value argument. There's a lot of ink spilled on whether growth is better than value or value better than growth, whether small companies are more important in a portfolio or large companies, or whether it's more important to have money invested in emerging markets verses domestic developed markets. I think this is a, sort of a canard. The most important thing is to build a diversified portfolio with all these different pieces in there. I'm Jonathan DeYoe, with DeYoe Wealth Management, Berkeley, California, thanks for listening.


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