Create a Foundation of Diversification

Physician's Money Digest, July 2005, Volume 12, Issue 10

Investing is not gambling. For example,you would never want to bet onevery horse in a race. That would bea sure recipe to lose money. The point ofgambling is to pick a winner. Soundinvestment planning, however, is notabout picking a winner. The goal shouldbe to create a portfolio of differentstocks, bonds, and other investmentsthat can do well even if individual componentsof the portfolio falter.

Building Diversification

The good news:

Why build a diverse portfolio and notjust place a few bets on our favoritestocks? Simple, we cannot predict thefuture, and too much is riding on that predictionanyway. We need to structure ourinvestments in a way that can achieve ourgoals even as different economic scenariosplay out. A well -thought-outportfolio can actually lead to higherreturns with less risk than a more concentratedbet on a few positions.

Example:

Diversification begins with puttingmoney to work in different types ofinvestment classes, such as stocks, bonds,and real estate, in amounts appropriateto your age, goals, and circumstances.Once you settle on the mix of your portfolio,find the best assets in a particularclass. For energy, stick withExxon instead of that oil well interest;for bonds, stick with triple A-ratedbonds or a highly regarded bond fund;for real estate, buy a well-managed realestate investment trust (REIT) rater thana risky limited partnership.

Finely Tuned Portfolio

The next step in building a diversifiedportfolio is to make sure that differentparts of that portfolio will not necessarilymove in lock step with each other. In2000, many people found that theirseemingly diverse stock holdings in technology,telecom, media, and Internet allfell together. Therefore, create a mix ofdifferent industries in your stock portfolio(eg, health care, energy, utilities, andtechnology) that will not move as one. Ifyou own mutual funds, check to see theoverlap between the largest positions inthe different funds.

Diversification does not mean buying alittle of everything. Studies demonstratethat a 10 to 15 company stock portfolioprovides much of the diversification benefitof a much larger portfolio, while providinga chance to focus on stocks thatyou or your advisor know well andbelieve can outperform the market.

If you find yourself with a lump sumof money to invest, spread out yourinvesting over several months to avoidan otherwise unavoidable downdraft inthe market. If you are already fullyinvested, make sure a good deal of yourportfolio is liquid enough to quickly turninto cash if you need it. It is alwaysimportant to have emergency funds.

is the principal

at Arrival Capital Management

LLC. He welcomes questions

or comments at jay@arrival

capital.com. This article was

reprinted with permission from

the Southern Ulster Times.

Jay A. Rosenberg