4/16/06
Diversification – Pros and Cons
Diversification is a way of looking at your investments and not putting all your eggs into one basket. This is generally done to balance your portfolio, so that when one section is not doing particularly well, your overall balance is maintained by other sections bolstering it. This can further be broken down into the sections of your portfolio, meaning that your stocks are not all in one sector, and bonds are not all a certain grade or from the same industry. (more on bonds next week)
Two points of view on diversification of your portfolio. One is that you should diversify to minimize losses at any given time. This is the “better safe than sorry” or “don’t put all your eggs in one basket” strategy. Many people are totally sold on this perspective, and I don’t think that there is anything wrong with it. A rule of thumb is that the younger you are the higher percentage of your portfolio should be in stocks with a minimum 30% in bonds. This should gradually shift until by retirement you have 30% in stocks. This is to give you peace of mind in retirement, shifting to less risky investments with stable returns in a period of your life when you don’t have time to recover from a swing in the market.
The other point of view is to “put all your eggs in one basket and keep a very close eye on that basket.” This means that if you have extreme confidence in a limited number of investments put most or all of your money in them and keep close track of how they are doing. Fortunes have been made and lost using this method. I think there are merits to each point of view, and how you invest is a reflection of your personal outlook and where you are at in your life. Are you a risk taker? Are you close to retirement? Are you looking to make great gains, and can afford to take great losses? Risk and return. For the investor, new to the market, diversification makes sense, especially if you are handling your own finances and making your own decisions.
That's all for this week,
thanks
Rob
The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy
copyright Robert E. Britt 2006
