Home » Business & Finance » Investing/Personal Finance » Diversity helps weather the storms: If you must have one thing,

Diversity helps weather the storms: If you must have one thing,

© Kirk Lindstrom

I'm tired of hearing about this in the office, but I never tire of it for a portfolio. I'm not well known for being "PC".

On April 11th, I wrote that I thought the market was in a correction and it looks like we are halfway back to our all-time highs. Some sectors of the market, especially the small cap, are in a deep correction still and might be an interesting place for a portion of your portfolio to enjoy above-average returns if we do return to bull market form. Beware... I have ten percent of my portfolio in one of these aggressive momentum mutual funds and it is down 25 percent so far this year. It is interesting to note that the broader markets, the Dow and S&P 500, are up 4.5 and 3.3 percent for the year while the NASDAQ is off 6.3 percent. The money is being made in the big names these days. Since I have a well-diversified portfolio, my overall performance for the year is about even.

I can't stress how important I think it is for you to know what you have, what you paid for it, and how your total portfolio performance is doing. You see, many beginners will put their money into the high flying funds with the great one-year returns only to see their net worth get hammered when the high-flying, risky fund they buy takes a big dip. They only have one fund, it drops 20 percent, they get scared and sell, and by the end of the year the fund might actually turn around and be a winner, but they've lost since they sold out. If you limit your exposure to any sector to say ten percent of your portfolio, then a 25 percent drop in that sector will only translate to a 10 percent x 0.25 = 2.5 percent drop in your total portfolio. If the remainder of your portfolio is in investments similar to the overall market then your average return will be more reasonable. I find knowing this helps me weather big drops in portions of my portfolio so I don't get scared and sell before the investment turns into a big winner.

Of course, sometimes you might buy a real dog of an investment and the only thing is to sell, but you only sell if the fundamentals have changed. Often, when an investment is way down, you can consider it "on sale" and get more. I did this with IBM in late 1993 when it was down in the $45 range. Today it closed at $150.75 so I more than tripled my money in under three and a half years! I had bought IBM originally as a dividend stock in the late '80s for about $90 and saw it go up and then they had major problems and they cut their dividend several times and the price fell. I held on and bought more each time it fell another $10 below what I paid until it got below $70. Then I decided to wait and see if I could catch a bottom. I studied the company and what they were doing and sure enough, I doubled up my position within 10 percent of the bottom. If I had panicked and sold when my $90 investment dropped 10 percent as many do, then I would have never made the huge gains. Some will say "well, you could have waited until it got to $45 before buying ANY more and made even more money." If my crystal ball wasn't so dusty, I surely would have done just that, but I'll take what I got.

The copyright of the article Diversity helps weather the storms: If you must have one thing, in Investing/Personal Finance is owned by . Permission to republish Diversity helps weather the storms: If you must have one thing, in print or online must be granted by the author in writing.