Fundamentals of Market Investing by Adam J. McKee

Even in your discretionary portfolio where you may deem it wise (or just fun) to buy individual stocks, you need to be aware of risks.  Single stock risk is bad, but single sector risk can devastate your mad money account.  No matter how great stocks are doing in a sector, stay diversified and don’t overexpose yourself to a single sector!  Companies as diversified as Take Two Interactive (video games), Apple (think iPhone), and NVidia (high-end gaming and virtual reality chips) tend to all rise and fall together with “Tech.”  You can be down 10% in an afternoon if you put all of your eggs in one basket.  Pick one tech name, and then do not buy any additional names.  The same advice goes for every sector.  The best advice is probably to buy the best of breed when it is on sale and add to it on dips.

When markets go down, especially in a declining economy, many investors will sell their former high flyers and buy into defensive stocks.  These tend to be the least sexy names on Wall Street.  Utilities, canned soup, soap, and toilet paper are examples of things that everyone will still buy no matter how bad the economy gets.  Soup makers may not get rich, but they will stay relatively even during the times when the cyclical stocks are declining badly.

Even under these conditions, you don’t want to be in the same sector or two across your entire portfolio.  If the decline was just a blip (a minor correction) before the market moves higher, investors would sell boring to generate cash to buy the next hot move.  Even in your discretionary portfolio, you always want to own a few defensive names (that, according to some, pay good dividends).  You don’t, however, want to own a bunch of closely related names that will decline together if economic conditions change.

[ Back | Contents | Next ]


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.