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9/24/06 Diversified Portfolio Part 2 I wanted to go into a little more detail on diversification of your portfolio. (Part one- http://www.wealthtrainingsource.com/041606.htm -was back in April ) I had talked about having some diversity versus having a few very solid choices, now I would like to go into the true meaning of diversity. To get to basics diversity means having a variety in your portfolio, not only a mix of stocks and bonds, but also where the companies are located and what they do – services, products, commodities, etc. The question was raised whether having stocks in various companies was enough to protect you from a downturn in the economy, and truthfully there aren’t a lot of stocks that are going to do that, if you have all your money tied to US companies. So, to start out, you should have some diversification in location. I’m not saying buy stock in Arctic and Antarctic companies. However, having some investments in Europe and Asia that compliment your US or North American holdings is a good idea. A second factor to diversification is to make sure that your investments are also in different industries. For instance, if you invest in a hotel chain, you are putting money into the travel and tourism industry, but the stock price also reflects real estate holdings of the company. That means prices in the real estate market can affect the price of the stock. Also if tourism is down (maybe due to airline issues) the bottom line gets impacted. Those factors aside, you might also want to invest in a manufacturing stock and a mining company. This way your portfolio is multi-dimensional. So, to take that one step further, if the hotel stock is strictly a US based company, perhaps you might want to look at a steel mill in Europe, and a mining company in Asia. (This is all just for illustration purposes.) These would all be complimented by a few selections of bonds to make up a percentage of your portfolio. The point being made is having a bunch of different stocks, all in the electronic industry in the United States, is not diversification. Those are all tied together. (in a sense) If you have good timing having a group of stocks in one industry might serve you well. One example would be the dot com craze a few years back. That same example a short while later shows how diversity would have saved you some terrific losses. I hope this information helped to educate, at least a bit, on the benefits of a mixed portfolio. Rob
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Want a scholarship into the Millionaire Mind Intensive worth $2590? http://www.secretsofthemillionairemind.com 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 |
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