Portfolio diversification: time to plant the seeds

Money Matters: Oct. 2009

Even though the sun is still out the last weeks have been rough, volatile and stressful. A sincere disadvantage for portfolio managers. Investment is mathematics, save your feelings for the leisure time.

Portfolio diversification must be rock solid, and needs to include cash, bonds, funds, stocks, and some spare change for special events. Cash is for unforeseen liquidity requirements, bonds for constant return. Funds should be chosen globally to gain from general economic up swings. Stocks should be sector based. The spare change is for passionate, short term profits.

In this review we will be focusing on Sectors in Stocks.

First of all, don’t wait for the big blocks, the perfect wave; an average return of 10% on your portfolio will result in 2.810% ROI (Return on Investments) in 35 years. It seems like a long road, but it starts with the first step. Pave the road for the future.

Energy stocks, pharmaceuticals and finance, these stocks have been hit the most in the latest financial crisis.

Take a look at the enclosed chart and use your common sense. Energy is a daily need, pharmaceuticals is a must, and for the passion, we need the upswing in the financial sector, the heart of the system. The percentage of your investment in each sector is your decision, (you’re the Pro, I’m just your caddy),  but my recommendation is don’t put all your eggs in one basket.

If you are planning to stay on the fairway, take the iron, overweight pharmaceuticals and energy stocks. If you are looking for a hole in one and willing to take the risk, overweight the financials, the drivers. Enclosed is a short list of stocks in these sectors. I am encouraging you to do your own research and calculations for your first pitch.

Years back when I still was a junior, one of my analysts took me aside and said, “I can see the passion for stocks in your eyes, but you have to learn, the market is shallow. Don’t fall in love; date the stocks, don’t marry them.”

The message was clear: in order to be successful, you have to set buy and sell limits, take profits, and cut the losses. If you succeed in six out of ten ideas, presuming equal investments and equal performance, you will be rich at the end.

Which might just be how I got my name…

Until then, let’s work the system…

This is Richie Rich, reporting from the Front. Stay tuned!

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