09-24-2013, 06:31 PM
From my perusing the blogs, it appears that most investors have the opposite problem of being overconfident in their stock decisions. Most investors just look at the financials and don't really know the businesses. In this environment, diversification is extremely important.
This doesn't mean you should try to become instantly diversified. I have read several investment books that push mutual funds to get instant diversification. Start with a minimum investment amount (I use $1000), then invest periodically in the stocks that are the best value of candidates that are currently below your target weighting. When the percentage of a given stock falls below a given weighting, it is eligible to buy new shares.
This also doesn't mean that you should sell a stock that has risen dramatically. Just let it ride and don't buy any new shares. A stock that goes from 3% to 6% of a portfolio is not a real problem. However, a stock that is 30% of your portfolio (after you had the opportunity to accumulate different stocks) should have its position reduced. My fiance ran into this situation when one of her large stock holdings was acquired by another of her large holdings.
Diversification should be a buy criteria.
This doesn't mean you should try to become instantly diversified. I have read several investment books that push mutual funds to get instant diversification. Start with a minimum investment amount (I use $1000), then invest periodically in the stocks that are the best value of candidates that are currently below your target weighting. When the percentage of a given stock falls below a given weighting, it is eligible to buy new shares.
This also doesn't mean that you should sell a stock that has risen dramatically. Just let it ride and don't buy any new shares. A stock that goes from 3% to 6% of a portfolio is not a real problem. However, a stock that is 30% of your portfolio (after you had the opportunity to accumulate different stocks) should have its position reduced. My fiance ran into this situation when one of her large stock holdings was acquired by another of her large holdings.
Diversification should be a buy criteria.