Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market
Rule #8: Diversification
Diversification will save you from major losses and potential ruin when all else fails.
You can do your research and select only those stocks with great fundamentals...
You can be the best reader of technical charts and time your entry points exquisitely...
You bought only those stocks that are in the sweet spot of institutional ownership...
And, your stop loss calculations are meticulously derived and rigorously followed...
But... You ignored diversification and had 50% of your portfolio in REITs and 50% in oil. The market suddenly reverses on you and all your wonderful paper profits go away in a flurry of downgrades and market consolidations.
This scenario happens to investors all the time. Diversification could keep this from hurting you investment success.
We NEVER know when the market is going to reverse and turn against us. But, rarely does a reversal occur in every industry and every sector at the same exact time. Way more often than not, market sell-offs occur in pockets of stocks... certain sectors and/or industries. Likewise, even in a bear market there will be some stocks in some industries that are moving upward in price. Money is always flowing from one industry or sector into another.
The key is to never have all (or even a large percentage) of your holdings in any one sector or industry.
Here are my sub-rules that I follow in order to keep my portfolios appropriately diversified:
- Never hold more than 25% of a portfolio in any one Sector, and
- Never hold more than 15% of a portfolio in any one Industry.
This is not a complicated or difficult rule... but it will save you when all else fails!
Continue to Rule #9, Asset Allocation. |
