Well today wasn’t much of a day for the stock market. The Dow gradually worked its way lower and lower to close down a hefty 145.64 to settle at 10,152.80. The jobless claims came in line with what the analyst had predicted. There wasn’t much news to drive the market in a positive direction. Nike reported yesterday and they were in line with the analyst. Investors didn't seem very upbeat about Nike's earnings and consequently the stock sold off and dragged the rest of the market with it. In this market a company must under promise and over deliver. Until unemployment decreases substantially the market will continue to be volatile and making substantial money will be limited. The market needs direction!
Today is a perfect day to talk about diversification. Diversification is extremely important when investing in stocks. Diversification is a process of spreading your risk among multiple companies instead of relying on one company to determine your financial future. Many went through and suffered the recent financial disaster and watched companies they never thought would fail file for bankruptcy. Many investors had all their money tied up in individual companies. One company that comes to mind that ran into financial trouble is General Motors. I personally new people that had money invested in this company. Some had most if not all their retirement in GM Stock. They lost everything! It’s sad but stuff like this happens and that is why diversification is essential in the stock market. It allows you to withstand devastating blows to individual companies.
Diversification is the best way to protect yourself against bad news and unforeseen problems that may occur in the future. The downturn of the economy can destroy your assets overnight. Another recent example of a company that has run into bad times is BP. No one would have ever thought that a company so large and prominent could be on the verge of bankruptcy because of one incident. An incident that has changed many lives and in my opinion could have been prevented if the company had maintained proper functioning of the safety nets to prevent an accident from occurring in the first place. One thing I remember from working at GM is that all accidents are preventable. You have to always play defense. That's what diversification is for!
So please diversify your assets by investing in multiple companies or find yourself a great mutual fund that is spread amongst multiple industries. This strategy will allow you to participate in industries that catch fire and take your stocks or fund higher. It’s tough to be in one individual company and benefit from other industries that are going up while your stock is out of favor and your not making any money because you failed to diversify. I always think of the opportunity cost. I personally invest in a handful of companies and at times I want to cut and run onto the next great stock. The first thing I determine before I make my decision is will I benefit if I sell this stock to move onto another. If the opportunity cost is in my favor than I have no problem moving onto the next stock. I diversify among multiple stocks because the reality is not all stocks move up at once. Some industries are in favor while others are not.
Some may say diversification cuts into the gains you can make in individual stocks and that may be true. However those who got caught with all their money in Enron, Lehman Brothers, WorldCom, Washington Mutual, and GM wish they would have diversified. I personally have been caught with a substantial amount of money in a stock and have lost more than I would like to discuss. I learned from my mistakes and want to save a little heartbreak and help others (You) not make that mistake of potentially losing it all. If you have little money it is hard to invest in multiple companies (commissions will eat all your profits) so you will be better off investing in a mutual fund. If you can invest more ($5000) try to have your money in at least 5 stocks that are in a different industries and have nothing to do with each other. If you still want to take a shot at an individual company beware of the ups and downs. You can still make money, but you’re at the risk of the markets large downswings. You may have invested in a good company, but if the fund managers aren’t investing in your particular investment you could be sitting on a losing stock for quite some time.
I invested in individual stocks for the first 5 years of investing and was lucky enough to make money before the market came to a screeching halt. I have since over the past few years changed my tune and have diversified my portfolio to my liking. Yes I still trade individual stocks, but have diversified some of my assets over multiple stocks and into mutual funds to even out the market volatility of owning individual stocks.
Remember Diversify, Diversify, Diversify!!!
Thank You,
Clay-
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