Investing 102

[GregWeld]

Originally Posted by Steve_O

Greg,

Re: Diversification, a google search reveals 10 'sectors' (investment sectors...).

Are there some sectors you might favor? Sectors to avoid? I'm about 15 years away from retirement if that factors in.

Is there a rule of thumb about spreading risk? One stock of each sector before 2 of any one sector?

Sorry if this has been covered, I'm up to about page 75 in the thread and
had not seen this question.

Battling 'analysis paralysis' but I just opened a Schwab account, so I'm close to making some moves,

Thanks for the info and the motivation!

Steve O

Excellent questions!!!



Okay -- I'll try to keep this simple (the market is anything but!)....

Diversification is based on how much you really have to invest -- time horizon -- adversity to loss of capital etc. It's pretty dang hard for a guy with 5 grand to invest - to get much diversification.... at 10 grand a guy could buy 10 stocks - 1 grand each. I personally don't see any need for more than 20 stocks - regardless of how much money you have... 20 stocks will keep you in the 5% rule. More than that is just kind of a waste of effort and you loose track of what you own.

SECTORS are a different story. Sectors tend to go in ROTATION.... one sector can be a looser in an up market -- as investors roll out of that sector and invest in another sector. So just to have every sector covered.... is probably not a good strategy.

If you read this thread --- I'm personally more about owning the best of the breed in the field that you're going buy in -- and even more about owning names that you know and understand... by understand - what I'm saying is places you shop - places you eat - places that you buy from - in other words - something that you personally can look around and say -- I like this dump - and the parking lot is full - and the merchandise is good and these places seem to be well run. Whatever "these places" are...


The reason for that is because I believe that it's important to hold and invest more when things are crappy. If you can look around and trust the business you've invested in - then you'll tend not to panic and sell just because the share price isn't so hot for a year or two. And if you like the company - then you might feel comfortable adding to your position when things aren't so hot - and that's where real investors make their money.


SO -- make a list of places you'd like to own.... Just for fun - let's say
Home Depot
Ford
McDonalds
WalMart


Okay -- then we look and say -- you have THREE retailers --- but break it down more and you have FOOD -- General merchandise -- Home building supplies... and a manufacturer (Ford). I don't really see a problem in owning those stocks even though they're not diversified by "sector".

Now --- I like to own some OIL.... whether or not that's pipelines -- retailers - drillers - refiners.... there's so many kinds and types -- but again -- never buy something you know nothing about. I happen to always buy Chevron... I like their product - I see their stations -- I can sleep at night owning it. Maybe you're a Conoco guy... but you see where I'm going.

I don't own sectors I own COMPANIES that I like and can live with and understand -- and that pay me to own them (dividends) -- In other words -- they like to share their profits with me.


So the short answer is --- you don't want to be in all retail -- or all banking -- or all housing.... BUT -- you do want to be in great companies that pay you to own them and that you love.

Do that --- and you'll be happy and successful over time. Why own something in a "sector" you don't know a damn thing about -- just for the sake of being diversified.

So here's something else ------- I don't smoke or drink ------ But I love cigarette and booze stocks... because people buy them in an up economy or a down economy... even if a guy is laid off - he's still puffing away... While I might hate that and wish he'd quit.... he's not going to -- and I'm going to make money off that. Can't help him - might as well help myself. They're called SIN STOCKS.... don't overlook them.

I used to own AT&T and VERIZON -- then I said --- why bother -- AT&T is who I use - so that's the one I own. Nothing wrong with either one of them -- but I'm a customer of AT&T so they might as well pay me back once a quarter with a nice dividend.


Hope that helps.


Take you a few nights -- but go back and read from the beginning.....