Diversification is key!
- DON’T : Buy local. The farmer’s market is one thing, but the financial markets are a different story. Investors are sometimes fooled into the sense that we “know” companies in our local area or the industry we work in, and think that it will give us an edge in selecting better stocks. Not true! Familiarity doesn’t mean that we make more profitable choices. What it does mean, is that you end up with too many holdings that are concentrated in a given area or industry. And that means your portfolio is unbalanced. You want balance because it decreases the wrong kind of risk.
- DO : Diversify, diversify, diversify. Repeat after me: A healthy portfolio is a diversified portfolio! You should have a balance of different asset classes: equities (stocks), fixed income (bonds), and hard assets (commodities & REITS). Your equity portfolio should include companies that are a mix of sizes (“market capitalization”, or small cap, mid cap, and large cap). Your equity and fixed income assets should span a range of geographies – invest globally!
