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One secret in "pinkyville" is diversification.

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atout Member Profile atout  
Saturday, November 18, 2006 5:27:16 PM
Re: kojira post# 1 Post # of 72 
One secret in "pinkyville" is diversification.

There are just too many who only post on one board and who have put all their eggs in one basket.

Diversification: A risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective amount of risk reduction. Investing in more securities will still yield further diversification benefits, albeit at a drastically smaller rate.

Further diversification benefits can be gained by investing in foreign securities because they tend be less closely correlated to domestic investments. For example, an economic downturn in the U.S. economy may not affect Japan's economy in the same way. Therefore, having Japanese investments would allow an investor to have a small cushion of protection against losses due to an American economic downturn.

Most non-institutional investors have a limited investment budget, and may find it difficult to create an adequately diversified portfolio. This fact alone can explain why mutual funds have been increasing in popularity. Buying shares in a mutual fund can provide investors with an inexpensive source of diversification.

For beginners and those who got a wake up call, start with reading Microcap Stock: A Guide for Investors from the SEC at: http://www.sec.gov/investor/pubs/microcapstock.htm



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