Diversification As An Investment Safety Net

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A diverse portfolio is a happy portfolio, and happy portfolios make for happy investors. It is never advisable to put all of one's money into one company, or even one kind of company.

To avoid getting caught in a depressed industry, skilled diversification includes companies from a good many industries, such as automotive manufacturing, building-material manufacturing, chemical and drug manufacturing, insurance, petroleum production and manufacturing, railroads, electric utilities, and retail stores. The portfolio of a diversified investment company is apt to include some 25 industries. Within each industry, of course, a careful buyer selects the stock of those companies which he estimates will do the best. For instance, in petroleum production and refining, he must choose among Gulf Oil, Standard Oil of New Jersey, Shell Oil, Socony Mobil Oil, Superior Oil, Texaco, and many others.

Geography is another aspect of diversification. A large American corporation generally does business throughout a considerable portion of this country, so that a buyer of the stock of such a corporation automatically obtains regional or national distribution. In principle, thorough diversification calls for owning equities in businesses in several nations besides the United States. But in other nations, except for Canada, the mechanism for investing in corporate stock is not well developed, compared to the ease of obtaining information and of diversifying among industries and corporations having their headquarters and doing most if not all of their business in North America. And in many industries, the volume of business done by American corporations is a large portion of the worldwide volume. But foreign opportunities are increasing and may expand considerably before many years.

How many stocks are necessary for adequate diversification? Obviously the risk of loss is less with two stocks than one, is less with five than two, and so on up. But a small investor, trying to own stock direct in a large number of corporations encounters practical difficulties in the size of broker's commissions he must pay, and in keeping himself adequately informed.

A typical investment company owns stock in from 50 to 100 corporations, and an individual can obtain this spread merely by owning shares issued by one investment company. This is the practical way for an ordinary saver to obtain first-class diversification.

An investor's need to diversify among common stocks depends partly upon his emotions. A man leading a dull life and demanding thrills in his investing certainly will find more excitement by concentrating on one highly volatile stock. But plenty of other possibilities for excitement are open to him. He might bet on horse races and sports contests, setting a limit on how much loss to risk each week, and having thus satisfied his demand for thrills, he could proceed calmly to invest his lifetime savings in a manner that reduces risk to a minimum.

Another type of investor is a natural worrier; the writer is a full-fledged member of this group. Experience has taught him that being able to sleep soundly at night is pretty essential for a satisfactory life, and owning diversified stocks is quite a help in avoiding insomnia.

Even for risk-takers, diversification is essential to long-term financial success. Any financial planner will say the same. If you currently have stock invested only in coal, we strongly advise that you run out today and diversify. You never know when coal just might go out of style.

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