Building a diversified share portfolio for beginners
Portfolio diversification is one of the central tenets of the share trading world. It’s a time-tested strategy that serves to mitigate risk by balancing a portfolio of investments, ultimately generating stable returns.
It’s often talked about in relation to a proverb: ‘Don’t put all your eggs in one basket.’ The eggs refer to your hard-earned cash and the basket is a single share or investment.
While it’s a cliche, it presents a very possible predicament. If that basket of eggs falls, you could be left scrambling to sell your shares at a price far below what you paid for them.
Whether you’re a beginner share trader, or you’re looking for a way to shuffle your existing shares around, consider diversification as a means of creating a solid foundation for your portfolio.
Here’s how it’s done.
What does it mean to diversify your share portfolio?
Diversification, in terms of share trading, refers to the practice of buying shares across various companies, industries, and markets, in order to reduce the risk of all your shares performing poorly at once.
Essentially, diversification is a defence against unfavourable market movements.
Why diversify your share portfolio?
The reason many investors suggest having a diverse portfolio is to spread around the inherent risk that comes with stock trading – losing all or part of the money you’ve invested, due to circumstances outside your control.
Let’s look at an example of a portfolio that hasn’t been diversified to demonstrate the vulnerability of narrow investing.
Imagine you’re only invested in a couple of mining stocks. Suddenly, a new law or regulation comes into play that restricts the mining industry’s activities in some way. This would likely cause your fellow investors to sell off their mining stocks, resulting in the value of your shares plummeting.
In that example, your whole portfolio relies on the stability of only one sector – mining. So, if share prices in that sector fall considerably, then it’s likely your whole portfolio will follow suit.
If your portfolio was diversified, however, you might not lose as much – you’d have other investments in other industries, or, other eggs in other baskets.
But diversification can also mean investing across several different asset classes – groups of financial instruments that hold common characteristics, such as shares, bonds, cash, real estate, commodities, and currencies.
If one of your asset classes falls in value, the other asset classes you’re invested in might balance out your losses by remaining stable, or in the best scenarios, rising.
Let’s have a look at how diverse portfolios reduce this risk.
How share portfolio diversification reduces risk
Diversification spreads the risk around several different investments and can help to balance out losses and stabilise returns.
If you have a diverse share portfolio, when some of your investments lose value, others may rise.
For example, while your shares in mining might be falling in value, your shares in another sector, like renewable energy, might help to offset your losses by rising.
How to diversify a share portfolio
To diversify your portfolio, you can invest in a range of market sectors (e.g. energy, utilities, and industrials) and invest in exchange-traded funds (ETFs).
Invest in different market sectors
When creating a diversified share portfolio, focus on investing in a variety of shares.
This means investing in a mixture of industries (or market sectors), not just a mixture of companies in the same sector – although, owning shares across multiple companies in a sector is also a viable way to add diversification to your share portfolio.
Some of the main market sectors you can invest in include:
- Energy (oil, natural gas, and coal)
- Materials (manufacturing goods)
- Industrials (construction and engineering)
- Utilities (electricity, water, and renewable energy)
- Healthcare (pharmaceuticals, biotech, and healthcare services)
- Financials (banks, insurance companies, trusts)
- Consumer discretionary (retail, automotive, luxury goods, hotels)
- Consumer staples (groceries, household products)
- Information technology (software and hardware)
- Communication services (telecommunications, media, and internet companies)
- Real estate (developers and project managers).
How to diversify your portfolio with ETFs
Investing in ETFs is another way to diversify your share portfolio.
ETFs are bundles of investments that usually have some degree of diversification built in. They can help you to diversify your portfolio through asset class diversification, market diversification, and sector diversification.
If you’re looking to diversify your share portfolio, make sure you compare share trading platforms to find one that gives you access to the companies, sectors, markets, and products (like ETFs) that you want to invest in. If you want to check out some award-winning platforms, a great place to start is with the best share trading platforms in 2023.
If you prefer to trade on the go, then make sure you research share trading platforms for mobile to compare the features of some great mobile trading apps.
Share account comparisons on Mozo - rates updated daily
Tiger Account
Small trade brokerage
Monthly fee
$5.50$0.00Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus receive US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit of at least AUD 2,000. T&Cs apply – for full details, go to the Tiger Brokers website.
Tiger Account
Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus receive US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit of at least AUD 2,000. T&Cs apply – for full details, go to the Tiger Brokers website.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Mozo special offer for new users only: 7% p.a. on uninvested cash balance for 150 days valued up to AUD2,877. Plus get US$30 TSLA and US$30 NVDA shares with accumulated deposit more than A$2000. T&Cs apply.
- Brokerage details
- 0.055% of trade value, $5.50 minimum brokerage.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Tiger Account
Share Trading
Small trade brokerage
Monthly fee
$7.70$0.00Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
Share Trading
Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- -
- Brokerage details
- $7.70 brokerage for trades under $100,000, then 0.05%.
- Settle from any bank account
- Settlement account offered
- Macquarie Cash Management Account
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Share Trading
ASX Shares
Small trade brokerage
Monthly fee
$0.00$0.00Join the world’s leading social trading platform, trusted by 30 million users worldwide. Invest in stocks, crypto, ETFs and more - all in one place. Hone your financial skills with a $100K virtual demo account.
ASX Shares
Join the world’s leading social trading platform, trusted by 30 million users worldwide. Invest in stocks, crypto, ETFs and more - all in one place. Hone your financial skills with a $100K virtual demo account.
- Monthly fee
- $0.00
- Monthly fee waiver
- n/a
- Special offers
- -
- Brokerage details
- There are no brokerage charges but a 0.50% fee is applied to all funds paid into or taken out of the USD settlement account
- Settle from any bank account
- Settlement account offered
- Customer funds are held in a Trust Account managed by JP Morgan Chase and Co
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- $5 USD withdrawal fee applies and a $10 monthly inactivity fee is charged after 12 months with no login activity.
Read our Mozo Review to learn more about the ASX Shares
Idle Cash
Small trade brokerage
Monthly fee
$5.50$0.00Receive interest on your uninvested cash. Deposit over USD/AUD 5,000 to start receiving 1.5% return; 2.25% return on over AUD 50,000; Up to 3.25% return on over USD 50,000. Mozo special offer for new users only: Get USD 50 fractional shares plus USD 25 Tesla shares with a cumulative net deposit of min. AUD 500 within 7 days of the first account opening. T&Cs apply.
Idle Cash
Receive interest on your uninvested cash. Deposit over USD/AUD 5,000 to start receiving 1.5% return; 2.25% return on over AUD 50,000; Up to 3.25% return on over USD 50,000. Mozo special offer for new users only: Get USD 50 fractional shares plus USD 25 Tesla shares with a cumulative net deposit of min. AUD 500 within 7 days of the first account opening. T&Cs apply.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- Mozo special offer for new users only: 7% p.a. on uninvested cash balance for 150 days valued up to AUD2,877. Plus get US$30 TSLA and US$30 NVDA shares with accumulated deposit more than A$2000. T&Cs apply.
- Brokerage details
- 0.055% of trade value, $5.50 minimum brokerage.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Idle Cash
Share Trading
Small trade brokerage
Monthly fee
$8.00$0.00Enjoy access to over 13,000 local and international shares and ETFs with $0 Commission on all international shares including US. Trade pre- and post-market with extended hours on over 70 key US shares. Get better rates on domestic shares for active traders - trade Australian shares from $5 commission. (T&Cs apply). Around the clock customer support from real humans (not chat bots). Trade international and Australian shares from the one account with intuitive desktop and mobile app.
Share Trading
Enjoy access to over 13,000 local and international shares and ETFs with $0 Commission on all international shares including US. Trade pre- and post-market with extended hours on over 70 key US shares. Get better rates on domestic shares for active traders - trade Australian shares from $5 commission. (T&Cs apply). Around the clock customer support from real humans (not chat bots). Trade international and Australian shares from the one account with intuitive desktop and mobile app.
- Monthly fee
- $0.00
- Monthly fee waiver
- -
- Special offers
- $0 commission on international shares.
- Brokerage details
- $8 or 0.1% of trade value ($5 or 0.05% with at least 3 trades in the previous month), whichever is greater. Phone rate $50 or 0.1%. 0.7% Foreign exchange margin. Shares held in a consolidated HIN under IGs name, ownership remains with share purchaser.
- Settle from any bank account
- Settlement account offered
- no
- CHESS ownership available
- Share pack
- Independent broker reports
- International markets
- Options
- Warrants
- IPOs
- Live data
- Market depth data
- Real time charting
- Other restrictions
- -
Read our Mozo Review to learn more about the Share Trading
Do diversified portfolios have the highest returns?
While diversified portfolios can provide more stable returns over the long term, they might not provide as high a return as concentrated portfolios – share portfolios that invest in only a few companies or sectors.
Of course, there are factors that contribute to your own portfolio’s returns, like overall market and individual company performance. So, there’s never going to be one right answer when it comes to the performance of your share portfolio.
Can you over-diversify a portfolio?
Diversification, while recommended, can be a double-edged sword if you over-diversify your shares.
The problem with over-diversification stems from the idea that adding new investments to your portfolio lowers your risk by stabilising your returns. This happens because investments that perform poorly might be balanced out by those that do well.
So, if you have too many diverse investments, this could result in the stagnation of your portfolio’s returns.
For example, if your portfolio is over-diversified, then any large gains you might make from owning stocks could be countered by a series of smaller losses from other investments.