Diversification

I read a suggestion that the minimum number of stocks you should have in your portfolio is five -- all from different industries. In doing this, you should not have more than 20 percent of your portfolio in any one industry (i.e., you shouldn't have 20 percent in Yahoo! and 20 percent in Google). This principle would have saved a lot of people money during the Dot-com craze since people were pouring all of their money into high-growth, high-risk technology stocks -- allowing their entire portfolio to be nested in one industry! I think that smart investors, like Warren Buffett, probably still did okay despite the burst since they had properly diversified.

I'm sure that there are loads of people who do very well without properly diversifying. But one downturn in the chosen stock can lead to a loss of years of growth, just like the Dot-com era. I'm also reminded of Amaranth -- a Hedge Fund -- that lost one-third of its value in one week because of bets in the energy market. $6 billion down the drain because it weighed too heavily in the energy sector. I think that all investors would be wise to learn from that mistake -- diversify!