As I said yesterday, taking a big loss on one investment idea can wipe out a pretty good investing year. Portfolio Allocation is really a two pronged attack. First, it is important to be invested in a wide range of assets; stocks, bonds, real estate, precious metals, commodities and cash. You can further break up the stocks and bonds into various catagories. Stocks can be large capitalizations, small caps, international, utilities, etc. Bonds can be corporate, state, municipal and federal government, and so called ‘junk bonds’. Stocks can also be allocated by industries to further diversify. It is important to remember that all assets don’t rise and fall in value together and to devisify by different catagoriesand industries will lower your portfolio’s risk of loss.
Next you want to be sure to not put all your eggs in one basket. Make sure you don’t put more than 4 – 5% of you portfolio in one idea. DIfferent stocks in the same asset catagory or industry can act differently. So keeping no more than 1/20 of your portfolio in any one idea will not hurt as much if that idea turns over and dies.
Tomorrow I will talk about when you should sell an asset.