All it takes is
one superstar stockto make you rich. To have the best
chance of finding that millionaire-maker, you have to
assemble a diversified portfolio that includes only the best
of the best stocks available. But even though everyone
talksabout diversification, there's one way to build
a great portfolio that will help you achieve all your
financial dreams.
Are you diversified?
Diversification means different things to different
investors. For those who are just starting out, a simple
index mutual fund may provide as much diversification as they
need in order to get acquainted with the world of investing.
In fact, many investors put together portfolios with many
different mutual funds that collectively give them exposure
to thousands of investments spanning the entire universe of
available securities.
Other investors look to diversified portfolios in the
context of asset allocation. Creating the right mix of
stocks, bonds, cash, and alternative investments can give you
the exact balance of profit potential and protection from bad
markets that makes you comfortable.
Nowadays, it's easy to put together a diversified
portfolio. With the help of hundreds of exchange-traded funds
(ETFs) that are tailor-made for whatever investing objective
you have, you don't need a ton of money to get broad exposure
to whatever type of investment strikes your fancy.
But just because it's easy to get diversified doesn't mean
that you should go overboard on it. In fact, many investors
who relied on a diversified portfolio of stocks to save them
during the bear market were sorely disappointed.
Is diversification dead?
From late 2007 to early 2009, stocks across the board
lost a huge amount of their value. Overall, the S&P 500
lost well over half its value, stunning many investors who
had never seen such a sudden and huge decline before.
Perhaps more painful, though, was the fact that there was
little refuge from the storm of the financial crisis. A few
stocks, such as
Wal-Mart (NYSE: WMT) and
McDonald's (NYSE: MCD), eked out gains in
2008. But for the most part, it didn't matter much whether
you invested in blue-chip megacap stocks or tiny company
stocks, well-known domestic companies or obscure businesses
from emerging markets around the world -- you lost money
anyway.
That's made many people question whether diversification
is really everything it's cracked up to be. The answer,
though, is that it depends on
howyou choose to diversify your investments.
The right way to diversify
Last year proved that you can't just toss a bunch of
different stocks together and expect things to work out
great. If you pick your investments badly, it doesn't matter
how many you have -- you're still going to lose.
Instead, the way to put together a winning portfolio
involves taking the best ideas from great investors and
mixing them into an amazing combination. For instance,
consider some of these proven investing methods:
Value investing. Seeking out truly great
companies at attractive prices helps boost your long-term
returns and gives you a margin of safety against market
downturns.
Dividend investing. Stocks that pay
dividends don't just give you valuable income to spend or
reinvest. They've also done better than their
non-dividend-paying counterparts historically.
High -
growth investing. Some innovative companies
break molds and create great business opportunities.
Investors who discover these companies early on can earn
huge profits.
Small -
cap investing . New businesses often run
under Wall Street's radar for years before they're
discovered by mainstream investors. Find those stocks
first, and you can reap big rewards once others finally
catch on.
International investing . Keeping your
money close to home is easy, but you can miss out on some
of the best investing opportunities in the world. Adding
international stocks can diversify your portfolio and give
you some protection from U.S. economic problems.
Even over the past two years, when the markets were
plummeting, you could find some exceptional stocks using each
of these methods that actually
rosein value:
Stock Example
Method
2-Year Total Return
MasterCard (NYSE: MA)
Value investing
17.9%
Partner Communications (Nasdaq:
PTNR)
Dividend investing
13.7%
Ebix (Nasdaq: EBIX)
Growth investing Continued... |