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Don’t be deceived into thinking that eight
airline stocks or eight computer stocks represents diversification.
They are all companies within a single industry. Strive for a
portfolio covering a wider range of industries. For example, you may
have some stocks in the health care industry, the retail area,
automotive, beverage, telecommunications, electronics, and others.
Over diversification means you are unable to
manage the large number of companies. If you limit your holdings to
ten stocks and a stock comes to your attention that you feel you
should buy, what will this force you to do? Probably eliminate one
of the under achievers you are holding.
The way to upgrade a portfolio is to sell your
losers and keep your winners, as this allows you the possibility of
continuously moving to a position of strength. When managing your
portfolio, you may find it helpful to utilize mutual funds. A mutual
fund has anywhere from 20 holdings to as many as 500 from a wide
spectrum of industry groups.
Purchasing a mutual fund will help your portfolio
become more diversified. When researching mutual funds, remember to
look at the industry sector weightings. By designing a portfolio
with several mutual funds you will want to be careful that your
overall portfolio is not weighted too heavily in one industry.
Roger Sorensen
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