Multiple Portfolio Holdings Reduce Risk And Increase Opportunity.




So what about the mix of your portfolio holdings?

How many different baskets are your eggs in?

One or two stocks? One or two bonds? One or two funds?

How lucky do you feel?

Being too narrowly diversified in regard to your individual holdings increases both your exposure to risk and... your need for luck.

One of the five basic elements of portfolio diversification is... creating diversity through multiple holdings.



A diversity of portfolio holdings.

The diversity of your investment holdings... in the context of which I am speaking... is expressed simply as...

The percentage of your total holdings that each individual holding represents.

Whether you have a stock portfolio.

Or... whether you have a portfolio of municipal bonds.

Whether you have a portfolio of stocks and bonds.

Or... whether you have a portfolio of mutual funds (my preference).

Regardless of what you are invested in... pay attention to how much of your total investment... that any one investment makes up.

Consider this example...

Say you are entirely invested in one mutual fund.

If so... that means that you have 100% of your investment in that one basket.

Even though your fund may be an excellent fund that has served you well... you are "never the less"... exposed to the risk that something could change and your entire investment could suffer dramatically.

What would be the effect of a new fund manager for instance?

Some will argue that diversification can be achieved... even while investing 100% of your money into just one fund... as long as the fund is a high quality "balanced fund".

Literally speaking... I cannot deny that possibility.

It is certainly possible for one fund to own a broad diversity of securities within the fund. Many do.

But from an overall strategic (risk) standpoint... I am still not fully comfortable having all of my eggs in even that sort of basket.

My objection is not so much about... a diversity of investments... within a particular fund.

My concern is instead... about the need for... a diversity of different funds.



That said... here is my opinion...

Never put 100% of your money in only one investment... regardless of past performance. 100% in one investment is far too risky... in my opinion.

If you invested in two mutual funds equally... then each fund would represent 50% of your total investment. 50% in any one investment is still too risky... in my opinion.

If you were invested in four funds equally... then each fund would represent 25% of your total investment. I prefer to have... no more than... 25% in any one investment.

My preference... however... is to create an asset allocation such that... no more than 20% of the total investment is invested... in any one security.

Consider your own portfolio holdings and calculate what percentage of the total each investment represents.

What would be the impact on your overall financial position should one of your investments experience a dramatic loss in value?

An investment portfolio of truly diversified investments will be diversified... through multiple Portfolio Holdings.

"Because It Matters"... Jim

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