Are You Diversified?

photo by Irish_Eyes
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An important way to stay afloat in the stock market is to be diversified. When someone puts all their eggs in one basket they run the chance of losing a lot of their capitol in one swift change of the market. I had a friend a few years back telling me that he was beating the market at a fast pace. When I asked him how he was doing it. He told me that he would follow one stock & play it though an earnings report or on the fact of a great news article & or headline of that stock. Well wouldn’t you know it, his “luck” ran out. He lost 75% of his portfolio in a matter of a week.

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When trading in the stock market, you must understand that you need to allocate only a certain percentage of your portfolio to each sector. That doesn’t mean that you dabble in every sector, it just means that you shouldn’t be in one sector/stock. I myself trade on the fact of earnings reports, but not all of my interests are in that one stock.

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Being diversified means more than just spreading your money around the market, but also making sure that you don’t go into multiple sectors that will effect each other or even depend on one another. With oil at a 52 week high I wouldn’t suggest owning a stock in an airline at the same time as being in a refinery company stock. Both are effected in such a way that you will lose money (unless maybe you short the stocks). At the same time though, I might give it some thought to be in a couple of different alternative energy stocks.

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Being diversified in the market is key in not losing your shirt. Do your homework & know how each of your investment interact with each other within the market. If you don’t, you’ll might have your own humpty dumpty that could take quite some time to get back together.

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