No Need to Diversify

It is commonly held that one needs to diversify his or her investments or spread the love around many different companies and funds so as to not leave oneself exposed to any one type of asset.

This well-known principle definitely applies to those long-term retirement investments that you have no intentions of cashing out for years to come. After all, markets have their ebbs and flows. Different sectors will fluctuate at different times. For anyone not watching their accounts closely, diversification is key.

As a trader, there is no better fund with which to diversify than the SPDR S&P 500 Exchange-Trade Fund (ETF) (NYSARCA: SPY). All 11 sectors are represented with SPY. Communications Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology and Utilities… it’s all there; totally diversified with sectors. SPY is managed by State Street Global Advisors, an ETF pioneer and one of the world’s largest asset managers. This stock is benchmarked to the S&P 500 Index from S&P Dow Jones Indices, one of the most trusted index providers.

As SPY touches nearly every corner of the American economy, it gives investors broad exposure to the worlds’ largest market and its most recognized brands, all in a single trade. No need to have detailed intel on many different financial instruments.

What I like about this ETF is that no one company is weighted so heavily that it directs the entire fund. Microsoft (NASDAQ: MSFT) is the heaviest at 7%. Nvidia (NASDAQ: NVDA) is 6.64% and Apple (NASDAQ: AAPL) comes in third at 6.35% while Amazon at 3.74% of the entire holding by weight. The reality, of course, is that if Microsoft does collapse, it will take other tech stocks with it, in the unlikely event that should ever happen. But in and of itself, if Microsoft were to go to zero, theoretically, SPY should drop only 7%.

This diversification of risk is paramount to ensuring that “not all eggs are in one basket.” By spreading out the risk, we may not enjoy the exceptional gains, perhaps, with a single stock such as what happened to Nvidia recently on earnings, but we will also not suffer the dire consequences of a disastrous drop either.

The more I study the market, the more I realize just how precarious trading is. We seem to be teetering on the brink of financial ruin with the way some companies are managed. Diversification removes much of that risk. SPY smoothens out that risk — a very comforting feeling, I may add.

With diversity comes volume. SPY trades over $38 billion on average per day, giving traders unmatched liquidity, which is crucial for order fills. With that ultra-high liquidity, you will find tight bid/ask spreads, allowing for easier profitability. Options now have daily expirations and are highly traded, enabling superior flexibility and a certain level of safety, if there needs to be one.

Bear in mind, there is risk with all trading, and SPY is no exception. This stock can swing wildly just as any other. But it is consoling to know that the noise is tempered.

My biggest advantage is that I no longer have to spend countless hours analyzing stocks, industries, sectors, etc. to see what to trade. I am totally diversified with each SPY contract I buy. Essentially, I am buying into all the top 500 stocks on the U.S. market. I save many  hours of scanning and investigating the many opportunities that make up a single SPY trade. I am now at the point where I can pretty much assess where the market will go during the day simply by looking at the fundamentals and technicals from 8:30 a.m.

And that is what we do in the Trading Room. We analyze the news and events that will shape the trading day. Then it’s time for a check of the technicals, establishing support and resistance lines, chart patterns and trends. After one final look at market sentiment, we are ready to enter the arena, confident in our executions.

If you are familiar with calls and puts, you are ready to learn and earn in our Trading Room. If you find this unique training facility is not up to your standards, a 100% money-back guarantee assures your full and prompt refund. Click here to subscribe and join our next Trading Room session, daily, 9:20 to 10:30 a.m., ET.

Not sure if day-trading SPY options is for you? Click here to join our Sunday night Intro to Trading/Week in Review webinar at 8 p.m., ET.