Risk Management
Diversification & ETFs
Don't put all your eggs in one basket. Here is how to buy the whole farm.
1. Why Diversify?
If you only own airline stocks and a pandemic hits, your portfolio crashes to zero. If you own Airlines, Tech, and Healthcare, you survive.
Sector Correlation
Stocks in the same sector (e.g. Energy) often move together. If oil crashes, almost all oil stocks crash. You need exposure to different sectors.
Reducing Risk
Diversification smoothes out the ride. When one sector zigs, the other zags. You avoid catastrophic losses from a single bad bet.
2. The Easy Way: ETFs
Buying 50 different stocks is expensive and annoying. Enter the ETF (Exchange Traded Fund).
The "Basket" Strategy
An ETF is a basket holding hundreds of stocks. Buying 1 share of the ETF gives you instant ownership of a tiny slice of every company in that basket.
SPY
S&P 500
Owns the 500 largest US companies. The default "Core Portfolio".
QQQ
Nasdaq 100
Heavy on Tech (Apple, Microsoft). Higher risk, higher reward.
XLF
Financials
Owns major banks (JPM, Visa). cyclical and steady.