If this is your first time visiting, check out the story behind this blog. Otherwise, please join the others by subscribing to my RSS feed or get updates via email so you don't miss any personal finance articles!
When I was talking about the Relationship of McDonalds’ McChicken, Personal Finance, and Me last week, Neville mentioned that food was like investing because it’s nice to have a balance portfolio. There is so much wisdom behind this statement that I want to bring this out to discuss on a post.
Even though many people don’t follow this, a healthy and balance diet, as we all know, is a way for us to live a happy and long life. This is the exact same thing for investing because a healthy and balance portfolio provides the diversity that we need to become financially free.
As with a balance diet, a diversified stock portfolio is very hard to maintain. There is always a temptation to put all our money into stocks that are in the hot sectors because they are performing the best, but it is very dangerous in reality because any sector can be crushed and our money will go with it.
Another very common way people become undiversified is with their company stock. I understand that many of us trust the company we work for so we buy its stock. In some other cases, those stocks were even given to us through options grants. However, it is very important to diversify our investment portfolio by selling some of the shares we own!
Can you imagine the life of those people that worked for Enron and had much of their life savings in its company stocks? There are some things that we cannot control, but diversifying is something we can do! Any stock or portfolio can really suffer, so all we are doing is making sure that we don’t go down with it when the ship sinks.
Being diversified also helps us participate in rallies in different areas that are working at the moment. For example, if we bought an index fund that tracks the S&P 500, we are missing out on the last few years of growth on the small cap funds. On the other hand, if all our money was in small cap funds, the last 2 months would not have been so good.
There aren’t that many things that are guaranteed in the stock market. However, along with long term growth potential of stocks, diversification minimizing risk is one of them.
Do you diversify with your portfolio? Some people diversify through different asset classes, other diversify with different sectors. How do you diversify? Share with us so we can all learn!
Related Posts
- Is My Citi Credit Card Using Creative Marketing or Is It Up To Something Else?
- Read the Fine Print is Especially Important with Anything Related to Credit Cards
- Setting Up Multiple Stocks Portfolios to Shield It from Your Emotions
- Balancing a Checkbook
- Paying Credit Card Interest Is Like Throwing Cash Into the Fire
Loading ...
{ 4 comments… read them below or add one }
As a foodie, I thoroughly enjoyed this post =)
Modern: Greetings from Taiwan! I’m glad you enjoyed the post.
You know when you have an addiction problem when you are at the airport and still trying to reply to comments!!!
Glad I’m an inspiration for this post. Actually after commenting, I had to go to McDonalds to get my “fix”. I’m good now for about another 3 years. =)
My “overall” portfolio (stocks, bonds, real estate, currencies) is diversified, but each account I have isn’t diversified.
For instance, I have a small real estate portfolio. my 401k focuses on foreign stocks, while my personal stock account focuses on mining and defense companies. With my last two accounts, I hold some stocks not denominated in US currency (so I have some currency diversity there too). Throw in a few bonds and CD’s here and there and that’s it.
I don’t mind risk in my portfolio because I’m still relatively young. I do extensive research in order to minimize my risk in the funds and sectors I invest in.
I don’t want to be so diversified that my returns are essentially minimized. That’s why I focus each of my accounts in a different area.
Neville: McDonalds should pay me for writing that post
I believe it should be adequate as long as your overall portfolio is diversified since it’s really the overall that counts.
It’s good to hear that you are doing much research in the funds and sectors you invest in because most people don’t do this enough!