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The Need For Diversification In The Stock Market
By ArticleTrader
Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don't get full value.
Some of you may have margin accounts. As you know, StocksAtBottom.com advocates cash ownership of stocks. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments.
Something can always go wrong in any one situation. Maybe something can go wrong in any two situations. It's tough to see something go wrong in 15 situations. That is the essence of diversification. SPREAD THE RISK AROUND. It makes a lot of sense. Some investors own 50 to 100 stocks. This is because they think they need that many to achieve the investment goals that they set out for themselves.
In business school at a master's degree level they teach you that to achieve true diversification you need to own something approaching 14 equity positions. It has been the experience of StocksAtBottom.com that 6 to 10 different equity positions is sufficient to achieve diversification. The one thing we know for sure is that it's not one stock or two stocks. Own one or two and you get killed.
Putting all your eggs in one basket
We advise all investors to own several stocks and to own more than one sector. Own more than one type of investment (that means equities, bonds, real estate, cash, you get the picture) or you will have problems. Sectors refer to stocks with broad themes. Examples are:
* Energy
* Semi-conductors
* Housing
* Auto
* Consumer
* Airlines
* Personal Computers
* Technology in general
If you own 10 stocks, but they fall into only 2 sectors then you really have not achieved diversity in your portfolio. You see, when they come to get Ford Motor, usually General Motors is not that far behind. By the way, it's great on the upside to own everything in one sector when that sector is going your way. There's probably not a greater high in the world than when everything you own is going up. On the flip side, when you are overly concentrated in a sector that's heading down, lower and lower every day, there is no worse emotional low. The depression can be almost unbelievable.
There's also the issue of owning more than one type of investment. There are equity investments, which are stocks. There are real estate investments, and bond investments. There are also venture capital investments, precious metals, and others such as oil and gas. To a large extent, you achieve diversity in your investment
British Pound Hits 6-Week Low Against US Dollar
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<a href="http://www.dailymarkets.com/forex/2010/09/07/british-pound-hits-6-week-low-against-us-dollar/" style="font-size:1.2em">British Pound Hits 6-Week Low Against US Dollar</a>
<br> <span style="color:#888888;">Daily Markets</span> - <span style="white-space:nowrap">7 hours ago </span>
<div style="width:80%;">Price action on GBP/USD (a 4-hour chart of which is shown) as of Tuesday (9/07/2010) has tentatively broken down below the previous major low of 1.5325 hit in late August to establish a new 6-week ...</div>
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British Pound Focus is on 14980
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<a href="http://www.dailyfx.com/forex/technical/elliott_wave/gbp-usd/2010/09/07/eliottWaves_gbp-usd.html" style="font-size:1.2em">British Pound Focus is on 14980</a>
<br> <span style="color:#888888;">Daily FX</span> - <span style="white-space:nowrap">9 hours ago </span>
<div style="width:80%;">No change: ?The British Pound has not found the support that the Euro has enjoyed. Watch the channel for support as well as 15250 and 15125. The pattern of the decline from 16000 is not clear-so ...</div>
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Great British Pound vs. Japanese Yen (2010-09-07)
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<a href="http://www.ibtimes.com/articles/60014/20100907/great-british-pound-vs-japanese-yen-2010-09-07.htm" style="font-size:1.2em">Great British Pound vs. Japanese Yen (2010-09-07)</a>
<br> <span style="color:#888888;">International Business Times</span> - <span style="white-space:nowrap">17 hours ago </span>
<div style="width:80%;">The GBP/JPY pair is still finding a solid support above 128.75 zones as seen on the provided four hour chart. RSI 14 indicator- momentum indicators' representative- is still carried above the ...</div>
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Buy British Pound at $1.5480, Mizuho Says: Technical Analysis
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<a href="http://www.businessweek.com/news/2010-09-06/buy-british-pound-at-1-5480-mizuho-says-technical-analysis.html" style="font-size:1.2em">Buy British Pound at $1.5480, Mizuho Says: Technical Analysis</a>
<br> <span style="color:#888888;">BusinessWeek</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">By Anchalee Worrachate Sept. 6 (Bloomberg) -- Investors should buy the British pound should it rise to $1.5480 as trading patterns suggest the currency will appreciate further, according to Mizuho ...</div>
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Exchange Rates: British Pound hampered by latest Economic data
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<a href="http://www.economy-news.co.uk/exchange-rates-06201009.html" style="font-size:1.2em">Exchange Rates: British Pound hampered by latest Economic data</a>
<br> <span style="color:#888888;">Economy News</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">Data that forex traders have been contending with this morning include news that new car sales in Britain dropped by 17.5 percent in August. The Pound Dollar exchange rate is 0.382% lower on the ...</div>
<a href="http://www.fxstreet.com/technical/analysis-reports/daily-currencies-report/2010-09-07.html">Forex Daily News: GBP Drops Against EUR, USD</a> - <span style="color:#888888">FXstreet.com The Forex Market</span><br>
<a href="http://www.istockanalyst.com/mobile/viewarticle.aspx?articleid=4474152">Thin Trading On US Labor Day Dampens Risk Appetite, Boosts USD</a> - <span style="color:#888888">istockAnalyst.com</span><br>
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British Pound Tumbles Against Majors
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<a href="http://www.rttnews.com/ArticleView.aspx?Id=1410510" style="font-size:1.2em">British Pound Tumbles Against Majors</a>
<br> <span style="color:#888888;">RTT News</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">(RTTNews) - During early European deals on Monday, the British pound fell sharply against its major counterparts despite a rise in regional stocks. The pound fell to a 4-day low against the dollar ...</div>
<a href="http://www.dailyforex.com/forex-fundamental-analysis/2010/09/Euro-s-party-is-ruined-by-the-Stress-Test/5889">Euro's party is ruined by the Stress Test</a> - <span style="color:#888888">DailyForex</span><br>
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Momentum Holds US Dollar While Sterling Continue To Recover
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<a href="http://www.actionforex.com/analysis/daily-forex-technicals/momentum-holds-u.s.-dollar-while-sterling-continue-to-recover-20100906121705/" style="font-size:1.2em">Momentum Holds US Dollar While Sterling Continue To Recover</a>
<br> <span style="color:#888888;">Action Forex</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">British Pound 1-monthvolatility fell 6.2 percent last week, making for the most sluggish price action among the majors. As with the Euro however, the correlation between sterling and the MSCI ...</div>
<a href="http://www.stockbriefings.com/british-pound-euro-gbpeur-exchange-rate-10/3172490">British Pound Euro (GBPEUR) Exchange Rate</a> - <span style="color:#888888">Stock Briefings</span><br>
<a href="http://www.forexyard.com/en/market-analysis/ny-close/british_pound_falls_to_six-week_low_versus_the_euro-2010-09-06">British Pound Falls To Six-Week Low versus the Euro</a> - <span style="color:#888888">Forexyard</span><br>
<a href="http://www.economy-news.co.uk/exchange-rates-07201009.html" style="color:#009900">Economy News</a>
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British Pound Slips Sharply Against Majors
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<a href="http://www.rttnews.com/ArticleView.aspx?Id=1410466" style="font-size:1.2em">British Pound Slips Sharply Against Majors</a>
<br> <span style="color:#888888;">RTT News</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">(RTTNews) - After trading higher in early European session,the British currency plunged sharply against major opponents later on Monday. At present, the sterling is trading near a 4-week low of 0 ...</div>
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Great British Pound (GBP) Technical Major Currencies (2010-09-07)
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<a href="http://www.ibtimes.com/articles/60037/20100907/great-british-pound-gbp-technical-major-currencies-2010-09-07.htm" style="font-size:1.2em">Great British Pound (GBP) Technical Major Currencies (2010-09-07)</a>
<br> <span style="color:#888888;">International Business Times</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">The pair stabilized within the bearish channel below SMA 50, with the current minor support level at 1.5345 impeding attempts to continue the bearish trend. Momentum indicators are showing ...</div>
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Great British Pound vs. Japanese Yen (2010-09-06)
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<a href="http://www.ibtimes.com/articles/59698/20100906/great-british-pound-vs-japanese-yen-2010-09-06.htm" style="font-size:1.2em">Great British Pound vs. Japanese Yen (2010-09-06)</a>
<br> <span style="color:#888888;">International Business Times</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">The pair inclined respecting the suggested bullish scenario of our last report flawlessly. Now, the possibility of forming a harmonic structure with a 38.2% Fibonacci correction for the XA leg ...</div>
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strategies by owning different types of investments, as well as investing in different sectors.
Let's go into a few real life examples. We at StocksAtBottom.com believe we have already made the equivalent of a lifetime of investing mistakes, so learn from a few of ours.
Arrow Electronics
It was Christmas week in the early 1980's. One of us was sitting at Bear Stearns as a limited partner at the time. We were doing very well as stockbrokers. It was the period of full commissions (no discounting), and clients were doing 10,000 share trades in $50 dollar stocks. Taking home an income of $500,000 to $1,000,000 in a year was no big deal at the time.
We were loaded up on Arrow Electronics, a NYSE company in the semi-conductor sector. Business was fantastic, the future was bright, and things could not have been better. Since we were involved on the banking side as well, we had an open line of communication to the company. We knew we had a good thing going.
The telephone rang on one of those beautiful days prior to Christmas when New York City is the place to be, Rockefeller Center all lit up with a 50 foot Christmas tree and all. "Hello." A harried response, "There's been a fire at the Tarrytown Hilton Executive Center, a lot of people are dead." "Okay, that's terrible, how does it affect me and by the way, what's for lunch today?" "Buddy, you don't understand," the dead pan voice says. "What don't I understand?" "The entire executive leadership of Arrow Electronics was in that fire." All of them, every one of them had been killed by this monstrous tragedy.
It was the worst Christmas imaginable for the wonderful families of this dedicated group of execs. The families never recovered, the company never recovered in terms of the people that were left, and the stock took years to recover. It plummeted from $32 per share to $4 per share in a matter of days. The recovery was slow and hard, it was agony all the way back on this particular stock.
Arrow Electronics is an example of putting all your eggs in one basket. It is an example of owning just one stock. SAB does not care how much you know about a company, things can go wrong and do go wrong. You simply cannot own just one company because the risk on the downside is too great. YOU MUST DIVERSIFY IN ORDER TO SPREAD THE RISK. Article Source: http://www.ArticleJoe.com Richard Stoyeck’s background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and StocksAtBottom.comstocksatbottom.com
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Forex: USD/CAD rises to 1.0480
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<a href="http://community.nasdaq.com/news/2010-09/forex-usdcad-rises-to-10480.aspx?storyid=35489" style="font-size:1.2em">Forex: USD/CAD rises to 1.0480</a>
<br> <span style="color:#888888;">NASDAQ</span> - <span style="white-space:nowrap">3 hours ago </span>
<div style="width:80%;">FXstreet.com (Córdoba) - The Canadian Dollar is falling sharply against Greenback on Tuesday and currently trades at the lowest levels since last Friday. USD/CAD holds near daily highs that lie at ...</div>
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Forex: USD/CAD rises to 1.0480rises
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<a href="http://www.fxstreet.com/news/forex-news/article.aspx?storyid=d6e82b30-0bb6-4103-b1e2-95bf8428ce47" style="font-size:1.2em">Forex: USD/CAD rises to 1.0480rises</a>
<br> <span style="color:#888888;">FXstreet.com The Forex Market</span> - <span style="white-space:nowrap">3 hours ago </span>
<div style="width:80%;">FXstreet.com (Córdoba) ? The Canadian Dollar is falling sharply against Greenback on Tuesday and currently trades at the lowest levels since last Friday. USD/CAD holds near daily highs that lie at ...</div>
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| EXCHANGE RATE
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<a href="http://www.dailynews.lk/2010/09/07/ExchangeRate.asp" style="font-size:1.2em">| EXCHANGE RATE</a>
<br> <span style="color:#888888;">Ceylon Daily News</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">Exchange Rates on 06.09.2010 (1) The average rates of the following currencies quoted by commercial banks in Colombo for Telegraphic Transfers (TT) at 9.30 am are as follows: Currency Buying Rate ...</div>
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Canadian Dollar Declines Against Most Majors
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<a href="http://www.rttnews.com/Content/CanadianNews.aspx?Node=B1&Id=1411136" style="font-size:1.2em">Canadian Dollar Declines Against Most Majors</a>
<br> <span style="color:#888888;">RTT News</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">(RTTNews) - The Canadian dollar traded lower against most major opponents during early New York morning deals on Tuesday. Against the US dollar, the loonie edged down in European and early New ...</div>
<a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/09/07/bloomberg1376-L8DNFG1A1I4H01-1HKT7B01S7HGNTAPLMD9ROOAMV.DTL">Canadian Dollar Falls Most in 2 Weeks as Stocks, Crude Oil Drop</a> - <span style="color:#888888">San Francisco Chronicle</span><br>
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Canadian Dollar (CAD) Technical Major Currencies (2010-09-07)
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<a href="http://www.ibtimes.com/articles/60040/20100907/canadian-dollar-cad-technical-major-currencies-2010-09-07.htm" style="font-size:1.2em">Canadian Dollar (CAD) Technical Major Currencies (2010-09-07)</a>
<br> <span style="color:#888888;">International Business Times</span> - <span style="white-space:nowrap">Sep 6, 2010 </span>
<div style="width:80%;">The pair found support at 76.4% Fibonacci around 1.0345 rebounding to the upside due to support from the bullish trend appearing through momentum indicators; therefore, we expect the pair to ...</div>
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Forex - Canadian Dollar Looks to BoC Rate Decision for Next Moves
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<a href="http://www.forextv.com/forex-news-story/forex-canadian-dollar-looks-to-boc-rate-decision-for-next-moves" style="font-size:1.2em">Forex - Canadian Dollar Looks to BoC Rate Decision for Next Moves</a>
<br> <span style="color:#888888;">ForexTV.com</span> - <span style="white-space:nowrap">Sep 3, 2010 </span>
<div style="width:80%;">RISK DISCLAIMER: By using this web site you agree to its terms and conditions. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of ...</div>
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Canadian Dollar Looks to BoC Rate Decision for Next Moves
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<a href="http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2010/09/03/TOF_903_cad.html" style="font-size:1.2em">Canadian Dollar Looks to BoC Rate Decision for Next Moves</a>
<br> <span style="color:#888888;">Daily FX</span> - <span style="white-space:nowrap">Sep 3, 2010 </span>
<div style="width:80%;">The Canadian dollar pushed higher against its US namesake last week, rising some 1.10 percent. Following a disappointing economic activity report for the second quarter, the USDCAD finds support ...</div>
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Forex: Dollar still under pressure against commodity currencies
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<a href="http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=b5591558-af3e-4081-909d-e51147530009" style="font-size:1.2em">Forex: Dollar still under pressure against commodity currencies</a>
<br> <span style="color:#888888;">FXstreet.com The Forex Market</span> - <span style="white-space:nowrap">Sep 3, 2010 </span>
<div style="width:80%;">FXstreet.com (Córdoba) ? Greenback is falling sharply on Friday against currencies tied to commodities weakened by risk aversion. AUD and NZD are approaching to daily highs together with main US ...</div>
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Forex: USD/CAD holds near 2-week lows
<div style="padding:0px; margin-bottom:1.5em;">
<a href="http://www.fxstreet.com/news/forex-news/article.aspx?storyid=8cefaae1-d09f-47c0-bcdb-10ba5ac45fde" style="font-size:1.2em">Forex: USD/CAD holds near 2-week lows</a>
<br> <span style="color:#888888;">FXstreet.com The Forex Market</span> - <span style="white-space:nowrap">Sep 3, 2010 </span>
<div style="width:80%;">FXstreet.com (Córdoba) ? The Canadian Dollar is posting important gains against Greenback and is holding close to daily highs. USD/CAD plummeted after the US jobs report to 1.0398, the lowest ...</div>
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Saskatchewan Roughriders Centennial Canadian Dollar Coin Launched
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<a href="http://www.coinnews.net/2010/09/03/saskatchewan-roughriders-centennial-canadian-dollar-coin-launched/" style="font-size:1.2em">Saskatchewan Roughriders Centennial Canadian Dollar Coin Launched</a>
<br> <span style="color:#888888;">CoinNews.net</span> - <span style="white-space:nowrap">Sep 3, 2010 </span>
<div style="width:80%;">by Royal Canadian Mint on September 3, 2010 Rider pride was in full swing as the Royal Canadian Mint launched a new commemorative one-dollar circulation coin honouring the Saskatchewan Roughriders ...</div>
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Forex is short for foreign exchange. When one speaks of a forex profit or loss, he is talking about the increased or decreased value of an ...
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