Portfolio Diversification

Diversification is the practice of spreading investments across different assets to reduce risk. The core idea is simple: don't put all your eggs in one basket. If one stock or sector drops, others may hold steady or rise, cushioning the blow to your overall portfolio.

Sector diversification means holding stocks from different industries — banking, real estate, food, chemicals, telecommunications, etc. The Egyptian market has 19 sectors, and different sectors respond differently to economic conditions. When interest rates rise, banks benefit but real estate may suffer. Diversifying across sectors smooths your returns.

Asset class diversification extends beyond stocks. A balanced portfolio might include stocks (growth), bonds (income and stability), gold (inflation hedge), and cash (liquidity). FoudaLens tracks USD/EGP rates and gold prices alongside stocks to help you think about your overall asset allocation.

Position sizing is equally important. Even within a diversified portfolio, concentrating too much in a single stock is risky. A common rule of thumb is limiting any single position to 5-10% of your total portfolio. This way, even a 50% drop in one stock only impacts 2.5-5% of your total wealth.

The FoudaLens Allocation Lab helps you model different portfolio mixes. You can test how varying your stock-to-gold-to-cash ratio would have performed historically. Remember: past performance doesn't guarantee future results, but it provides useful frameworks for thinking about risk.