Today I saw diversified investing in action. I own two tech stocks that have been fairly strong over the years. Well, today one of them had bad news and one had great earnings news beyond what was expected.
So one went up and one went down. And my net profit for the day turned out to be about zero. Nada. Nothing. Which raises the question for some: “How can that be smart investing? I want to make money, not keep it steady. A CD can do that and earn me interest too!”
Why diversified investing works
As an example, mutual funds are based on the idea of diversification, the underlying basis of portfolio theory. By spreading your money across a large enough number of different investment types and different sectors & industries you can help weather any individual stocks that tank. And that can happen even to the best of stocks.
As sound as a company may be it can take a hit. And never recover. Also, sectors can take a hit. Or stocks from certain countries. And that’s why owning a large enough group of stocks and other solid types of investments is the way smart investors not only keep their money but continually grow it.
Yes, there are downturns to the whole market. Even times like we recently lived through where the traditionally counter-balancing bond sector weakened at the same time as stock. But at least diversified investing lowers the chances of losing too much and increases odds you’ll come back up and do even better once the market recovers.
“I want to beat the market not match it!”
Some people see the stock market as a chance to make it big. Like in Las Vegas. Or winning the lottery. But if you place all your bets on one or two horses … er stocks … you can wind up losing it all. Or enough to really hurt.
Now I have known people to make individual stock picks that wind up as really smart investments. Like a former co-worker who bought 1000 shares of Apple stock when the price was just a few dollars because she liked their products. Well, she likes them even more now!
But even supposedly solid stocks can wind up going bankrupt and never bounce back. Or simply lose their luster — and lose you considerable money on an ongoing basis if you’re not practicing diversified investing. Lehman Brothers, once a Wall Street powerhouse, is now basically a zero-value stock.
Many may remember the name Enron for one of the most famous business fraud schemes ever. They were touted as a great investment. A supposedly thriving energy company. And today, while their stock has no value in the market, the good news is that there seems to be a collector’s market for the actual otherwise worthless stock certificates.
The bottom line
High flyers can also be low sinkers. Trying to beat the market with one or two stocks is gambling. Not saying you can’t do it. Just know that even the wisest financial investors can (and do) get zonked now and then.
But they have enough other well-diversified assets (and maybe a yacht or two) to help them feel secure about their investment portfolio … and just shake it off when any one stock goes south.
Over time, a well-diversified portfolio (with some safer investments like savings and CDs for liquidity) will get you ahead of where you started — and very likely grow faster than inflation, which is your primary goal for investing wisely. It’s the best way to “beat the house” in Las Vegas terms.
More posts to help
What You Need To Know About Owning Stocks
How To Handle a Stock Market Downturn
About Online “Insider” Stock Tips
6 Rules for Trading Stocks (for New Investors)
The Day I Bought My First Stock
Beyond the Basics: Tips To Help You Understand Stocks
Simple Guide To Bonds & Bond Terms
The Difference Between Bond Coupon and Bond Yield
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