Spreading Out Investments

Having big positions in a single stock is not always a good idea. Successful investors DO put in a chunk of their money in some stocks but that's because they have researched and have strong faith in their research. For small or average investors, its just not a good idea to put all the eggs in the same basket.

A key benefit of spreading out your total investment to several stocks is that you don't have to worry if an individual stock takes a big hit- your large portfolio should be able to absorb the shock. Perhaps, you can then stage a comeback, for instance, dollar cost averaging on the stock if you think it'll go up in the future. Even when picking a new stock for your portfolio, if your portfolio is comprised of a long list of stocks, you'll have to do less research on individual stocks, since getting hammered on one stock won't drastically affect your portfolio. So you might do a stock valuation and check the stock grading/analyst opinion and perform a quick general industry analysis(e.g. is a tech stock good to have right now?) and make the decision to buy the stock right there without looking at the detailed 10k or other investment literature for that stock.

This strategy relies on the following assumptions to be effective(apart from others):
  • You don't spend too much time monitoring stocks after using this strategy(i.e. using this strategy actually helps you save time)
  • If any day, for any reason, you have to sell/exchange all your stocks, you will go ahead and actually place the orders without worrying about the trading costs or other reasons(e.g. taxes)
  • The trading cost are reasonable compared to your total investment value and that you are NOT engaged in frequent trading(trading costs might outweigh returns)
  • You're diversified in other ways(different sectors, some Adrs, precious metals, ETF etc) as well
  • You do not worry about beating an Index e.g. S&P within a certain timeframe(since the performance of the stocks in your portfolio could be timed differently than the index)
  • The market as a whole doesn't go down. You can still practice dollar cost averaging or utilize other strategies discussed on this website

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