For me, this Internet company was different. Its service was something I used every day, allowing me to find
exactly what I was searching for on the Internet every time. Before this, Internet search was horrible. This
company had no competition. Other than its programmers and its computer servers, it had no costs. And it was being
used worldwide. Even in West Africa, everyone was using it. Now, the company was selling shares to investors for
the first time through an initial public offering (IPO).
It seemed like a sure thing to me, but most people were skeptical. And it was easy to see why. The Internet bubble
had popped in 2000. Wall Street had taken junky companies and sold shares in them, destroying the wealth of so
many people. No wonder most investors stayed away even when a really good company's shares were being sold.
Long story short... I took about 25% of everything I owned and bought Google's IPO at $85 in August 2004. I don't
own it anymore, but the shares of Google are up 1,400% since then, making it a stock market superstar.
Everyone wants big gains. Now, unless you want to dedicate your life to analyzing and figuring out markets like
me, your best bet is to diversify your portfolio. But it's critical to do it smartly so that you get the highest
return possible and still get a shot at some of those high flyers.
When it comes to diversifying your entire investment portfolio, my colleagues tell you to use gold and
collectibles to go beyond financial investments. That's good advice. Some of my money is in gold, and my
collectibles portfolio includes gold coins. And then it's a bit unconventional. I collect antique gadgets -
telephones, cameras, typewriters, gramophones and radios from the early 1900s.
Now, when it comes to stocks, you can get instant diversification by buying an index fund. That's an OK way to
diversify. But there's a smarter way to diversify that I bet you've never heard of. The great thing about this way
of diversifying is that you get the safety of being diversified and you get a huge increase in returns. For
example, in the current bull market, you'd have made 82% more using this way of diversifying.
Better Returns, Same Risk
You see, when you buy an index fund, you're diversifying through buying a basket of stocks. For example, the
"regular" S&P 500 is a basket of 500 of the largest companies trading in U.S. stock markets. Here's the key thing
for you to understand. The S&P 500 is cap-weighted. Cap weighting means that you end up owning more of the biggest
companies within the basket.
In the S&P 500, Apple has a market value or "market cap" of around $607 billion. Apple will have a larger effect
on the S&P 500's movement than toymaker Mattel with its $11 billion market cap. That's because the S&P 500 is
market-cap-weighted. Apple is given a higher weighting - 3.25% of the index compared with Mattel's 0.06%.
Turns out there is a smarter way to diversify the basket of stocks in an index. It's been proven smarter, because
the index goes up more. Way more. And it's not riskier.
Score: Equal-Weighted S&P 500: 282%. Cap-Weighted S&P 500: 200%.
By simply changing the amounts of stock in the index, you can get 82% more in return, which is pretty great if you
ask me.
Don't Put All Your Stock in One Basket
Equal-weighted means that every stock in the S&P 500 has the same weight in the index - 0.20%. Big stocks and
smaller stocks are treated equally. In a bull market, most stocks are going up. So the equal-weighted index goes
up more than the market-cap-weighted version because in many cases smaller stocks will make sharper, faster moves
higher than larger stocks.
Don't get me wrong. You definitely want big stocks in your portfolio. But you want newer, fast-growing stocks that
can zoom up like Google too. If you use smart diversifying tools such as an equal-weighted index fund, you get the
best of both worlds - the safety of big stocks and the growth of newer, smaller companies all in one.
Bottom line: If you're going to own stocks, be smart in your diversification of positions. The way to do that is
to buy an exchange-traded fund (ETF) that uses equal weighting.
Paul Mampilly joined The Sovereign Investor Daily in 2016, and serves as Senior Editor specializing in helping
Main Street Americans find wealth in growth investing, technology, small-cap stocks and special opportunities.
Article Source: http://EzineArticles.c
