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Stock Tool #5: Diversify

By Johns Wu on Sep 05, 2005

jimcramer.jpgEveryone knows that diversification is important in adjusting the risk of your exposed positions. For instance, mutual funds managers hold positions in hundreds of stocks at any given time.

However, smalltime investors like us have neither the capital to sufficiently hold hundreds of stocks nor the time to manage them.

I think Cramer gave some good advice on diversification on Mad Money. He said that you should hold at least 5 stocks to diversify, but less than 10 in order to have time to do your homework on your holdings each week. I'll admit, I break this rule most of the time, but its a good thing to keep in mind.

If you picked a ton of stocks at random, you would probably end up with about 50% winners and 50% losers. If you do your homework and pick a small handful of stocks where 80% are winners and 20% are losers and ride them out, you're in great shape.

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This entry was posted on Monday, September 5th, 2005 at 12:12 am and is filed under Market News. You can leave a response, or trackback from your own site.


3 Responses to “Stock Tool #5: Diversify”


By bumby_lansford on September 5th, 2005 at 2:54 pm

I think all this stuff about diversification is overblown. If you find a good opportunity by all means go for it but don’t just go buy something mediocre to be more “diversified”.

Focus of finding good opportunities and let the rest take care of itself.

By Jack on September 5th, 2005 at 6:34 pm

I’d agree with the previous post. (Plus I really detest Cramer). But thats irrelevant.

Diversifiation for a trader is plain stupid. A trader’s focus should be on finding good high probability trading opportunities. Forget about “oh i can’t buy this, cause I already have another oil company”. Conscious diversification is what you do when you lack confidence in yourself. And you probably shouldn’t be trading anyway, but investing instead — buy some Mutual funds. :)

By gotfrank on September 6th, 2005 at 6:50 pm

I agree with JWU.

Haven’t you guys taken Financial Investments? Diversification is to expose yourself to the different sectors to minimize risk and catch potential movements. Diversification is mainly for long term investing, and if you are perfectly diversified, you will have 0 variance (hence, 0 standard deviation) from the expected return.

For most of the people looking at these financial blogs, we are short term, or even day traders. Don’t even bother diversifying. However, RISK MANAGEMENT is the key even more so important in short term than long term investing. It’s not too smart to buy 5 oil stocks because you think oil is going up. If you think oil is going up, you take 2 at most, and that better not use all of your cash.

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