Growing Rich - Arabictrader.com

Rule 11
DON’T SPREAD YOURSELF
TOO THIN
All smart investors know that you should never put all your eggs
in one basket when it comes to investing in stocks. Diversification is
the name of the game. Spreading your bets over a handful of companies
and industries not only reduces risk, but also the price volatility
of your overall portfolio. That’s because when one industry is out of
favor, you can continue to profit from another of Wall Street’s current
darlings. “I think of a portfolio as a beautiful garden,” reveals Shelby
Davis. “Not every plant is in bloom all the time. This is why you want
to own an assortment of good companies.”
Nevertheless, owning too many companies is also a mistake. You
don’t want to overdiversify either. Your goal should be to keep enough
stocks in your portfolio to control risk, but not enough to cripple your
returns. The problem with owning too many companies is that if you
have one or two winners, they won’t matter much if they’re just a
small percentage of the overall picture.
THE “MAGIC” NUMBER
Roy Papp keeps around 30 stocks in each of his mutual funds,
which he contends might be too many for an individual portfolio. “I
believe in diversification,” he says. “Mathematicians have told us for
years that you need 13 stocks for theoretical diversification. I think
you really need 20 to 23 myself, though with a large fund I keep
around 30. You’re probably thinking that the average mutual fund
has around 60 to 80 stocks, and you’re exactly right. The reason is
they don’t have any faith in their choices. They are closet indexers.
If they want to be closet indexers, they need about 80 stocks. That
makes little sense to me. Would you be a happy client if I told you
I’ve got a great stock that’s the seventy-ninth best idea on my list?