“Diversification” – a lot of people throw that word around when it comes to the Stock Market. But do you really know how to use it strategically? Let’s break down the three types of investment diversification strategies that no one talks about…

Tune into the podcast, check out the show notes below, AND be sure to view the LIVE Case Study Replay at the bottom where I show you one of these diversification strategies in ACTION. 

You can also listen on iTunes and Stitcher 

What is the first thing that comes to your mind when you think about “diversification?”

Typically, you think about spreading your money around, buying a bunch of different stocks, or someone may tell you to diversify but not explain exactly what that means. 

I want to break down three methods that no one talks about. Because usually diversification means buying a bunch of different stocks or investments – mixing and matching – and just hoping you make some type of return. But with this style, typically the return is just mediocre or average.

But I want to talk to you about potentially SUPERCHARGING those returns and the power of diversification. 

1.) Using Sectors

A sector is a category that a collection of stocks fall under. For example, Facebook, Apple, and Google all fall under the “Tech Sector (XLK)”. 

The way that you can invest in a sector is through an ETF, which is an Exchange Traded Fund. An ETF is powerful because it is based off of a sector. 

Inside the XLK sector, for example, you have numerous stocks like we mentioned earlier, such as Google, Apple… etc… So instead of you trying to pick which one is the best, you can actually trade the whole sector by investing in the XLK. Each stock will represent a percentage of the overall sector.

If you have your money just divided up into different categories – like bonds or CDs – and they aren’t hot right now and they just aren’t moving, you have your money tied up. 

BUT if the Tech Sector is moving as a whole in a certain direction, you can participate in the movement without necessarily having to pick the best stock. 

The Power of Sectors – You can participate in movement without having to pick just one stock

There may be some stocks doing okay and some doing great, and you get to benefit from the ride up. 

You are diversified in stocks, but in the same sector. 

PROS OF SECTORS

  • No exposure to one specific stock (if just one falls, the sector usually isn’t impacted)
  • Can take advantage of the Hot Sectors without the pressure of picking one stock
  • You can trade options on ETFs as if you were buying an individual stock 
  • You get the benefit of certain stocks without having to specifically trade them 

As an example, the XLK Tech Sector is trading now for $68.29 (at the time of research), BUT to buy 1 share in Google the cost is $1,125. But the XLK contains Google and all the tech stocks for wayyyy cheaper! 

CONS OF SECTORS 

  • The ETF may not move as fast as an individual stock 
  • The entire sector may not provide safety if the whole sector faces headwinds

For example, when Apple stock recently popped and did well, the XLK Tech Sector did not move as much as the individual stock did. Apple holds about 16% of the XLK. So if it moves $10, the XLK only shows a move of about $1.60. 

Microsoft holds about 17% of the XLK. So if it went down $10, the XLK would go down $1.70. If Apple and Microsoft both moved up and down respectively, then the XLK actually would have gone down $0.10. 

That may be considered a con on the list for some people who would have rather picked just the stock BUT then you wouldn’t have had the benefit of diversification. 

2.) Using Options

When it comes to investing, most people only think about owning stock. If you have had a chance to check out some of my free trainings, you know that the flaw in this thinking is that you only make money if the stock goes one way – up.

Even if you are diversified with buying stock, this can be a problem. You typically only make money if the market goes up.

You have to dive deeper into diversification. 

Because the market moves three ways – up, down, and sideways. 

Just buying stock is not necessarily diversification with regard to strategy. But being able to buy calls and puts is something that a lot of people are NOT talking about and it allows you to diversify. 

For example, here is what I call my “Rental Income Strategy” – 

You can actually own stock, you can rent the stock out to other people by selling call options against your stock. I am talking anywhere between $500-$2,000 sometimes that you can bring in monthly just to wait (depending on the option you own). And if you are not called away from the stock you can do it again. 

If the stock goes sideways, you get to keep that money. This is just one way to make money from a stock that is doing NOTHING. 

And then if a stock goes down, you still get to keep that money! 

You can also use put options to even PROFIT in down times. A put option is like insurance. 

Here is an example of how that works –

If you own $100K worth of stock (1,000 shares at $100), you could buy a $90 put. You can force someone to buy your stock from you at $90. Let’s say that costs you $5,000. If your stock falls down to $70 from $100, you can force someone to buy it from you at $90 even though it is now worth $70, because you purchased the put option for $5K. They got 5 grand from it, you got your insurance. If you didn’t have that, you would have lost $30K. So what you lost instead was $100 to $90 ($10,000) plus the $5K INSTEAD of $30K. You reduced your loss by 50%. 

PROS OF OPTIONS 

  • You can get additional income 
  • You can get paid for waiting
  • You can get paid even if the stock moves down
  • You get peace of mind knowing that you can generate income from any type of market
  • You can typically increase your annualized returns 

Obviously, you need to learn how options work in order to start applying them. 

CONS OF OPTIONS 

  • Your stock can get called away from you (someone could call you up and want the stock)
  • You have to understand the math and the numbers 
  • If you are buying a put option as insurance, it could expire without being used 

For example, continuing with our one above, if the stock does not fall below $90 in between the option time it expires worthless. That $5K of insurance will be worthless and you will have to buy it again if you want more insurance. 

What’s amazing is we find options like this every month! 

And you may not even know it, but you are already playing this game… with your car. 

You pay insurance for your car every month. The insurance company is making you buy a put option every month. If you wreck the car, the bank is protected. 

You are doing this every month anyways… so why not become the bank?? 

This is a diversification component that is so important because the market does not move one way all of the time. You need to diversify when it moves up, down, or sideways. 

3.) Using Advanced Option Strategies

Advanced option strategies would include spreads, butterflies, and iron condors. If you are not familiar with them, don’t worry. That is why they are called “advanced”.  

This allows you to put a hedge if the stock goes up OR down when you do not know which way it is going to go. 

Here is an example… 

The members of Power Trades University and I did a spread on Facebook going into earnings. (You can check out the live case study from that below to see exactly how it went down) 

We were able to take advantage of the fact that Facebook was announcing earnings and reduced our risk by 40%! The profit on the trade was 99%. 

We had reason to believe that Facebook would beat their earnings. But it has happened before where a company will beat earnings and a stock STILL sells off. And the opposite can happen too – they announce bad results and the stock sky rockets. 

There are 3 components to a spread – 

  • What the stock is trading at 
  • What you can buy it for 
  • What someone can buy it from you for 

Here is a random example – let’s say a stock is trading at $100. We bought a $95 option for $7. If you add them together, our break even point would be $102. You can sell the option for someone to buy it from us at $105, for $3. 

We have the right to buy it at $95. We also have the right for someone to buy it from us at $105. 

We paid $7 for our option but sold the right for someone to buy it from us for $3. We reduced our risk by 40%. We brought in $3 – so we paid a net of $4. This is called a debit spread. Money came out of our account, but instead of $7 coming out it was only $4. 

We bought an option and we sold an option, and reduced our risk by 40%. 

I want you thinking about this… 

What is diversification truly?

When someone sells you on needing to spread your money around, are you diversifying from a strategy stand point? 

Do you know how to make money when the market goes down or sideways?

How can I learn and then apply these strategies? 

If you are looking for a place to learn, I recommend Power Trades University where we teach you how to read charts, how to trade options, AND how to do these advanced option strategies. 

As promised, here is our LIVE Case Study Replay from our Bull Call Spread with Facebook: