Insider Hints: Diversity is Key

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Market forces have as much of an impact on the individual as they do on the market at large. This is why it's so important to diversify your porfolio. The old saying "Don't put all your eggs in one basket" certainly holds true here.

Choosing a stock that will sell readily means making sure that the stock has a regular market. An easy way of checking this is to see if its price is printed frequently in some publication. The New York Times prints prices daily on more than 2,000 stocks, mostly those listed on exchanges. Wall Street periodicals give prices on still more stocks. The National Association of Securities Dealers issues to its members a daily report, quoting prices on many stocks sold over the counter, not listed on an exchange.

Extremely bad business conditions have sometimes halted the sale of all stock. The last time this happened was in 1933, when the closing of the banks made it practically impossible, for a few days, to make ordinary commercial payments. The entry of the United States into World War II, in 1941, caused stock prices to drop pretty low, but the market kept open. Ignoring the question of price, many issues of corporate stock are just about as marketable as a savings bond.

Having settled that a stock is marketable, an investor must still face the second question: "Will I be willing to sell stock when I need cash?" When the current price of stock is high, the principal objection to selling may be the income tax on the capital gain. While paying a tax is always unpleasant, it is hardly a good reason for refusing to sell at a good price, if the owner needs cash, unless he is in a high tax bracket. But when the current price of stock is low, selling can mean a big sacrifice.

An investor cannot forecast what the stock-market level will be at the future time when he happens to need extra cash. But his need is more likely to arise when stock prices are low. The same decline in business prosperity that causes the stock market to drop can also cut his salary or cause him to lose his job. So the ability to sell common stock can be a weak reed to lean on for the raising of extra cash.

In a mutual fund, the open-end type of investment company, a stockholder is protected against ever having to accept a bargain price. Part of the meaning of "open end" is that a mutual fund stands ready to redeem the shares it issues, and the redemption value is figured automatically on the combined value of all the stocks and other assets the fund owns. So if the share value in a broadly diversified mutual fund is disappointingly low, it is because general stock-market values at that time are down. Also, a mutual-fund portfolio, because it is diversified, does not drop in value as much as do some of the individual stocks included in its holdings.

A "balanced" mutual fund has part of its assets invested in bonds or preferred stocks or both, the remainder in common stocks. This causes the value of a share issued by the fund to fluctuate less than in a fund whose portfolio holds only common stocks. When general stock-market values drop, the share value in a balanced fund does not drop as far as in a common-stock fund. But on this point, a fixed-dollar investment with genuine insurance is better than a fund containing any stock at all.

The rule of thumb is to keep your portfolio diverse and balanced, and to put your money into several different places. The hope is that shifts in the market won't affect everything at once, so if the need arises for quick cash, you will have options.

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