Diversification As An Investment Safety Net

by David Jenyns on June 6, 2008

A diverse portfolio is a happy portfolio, and happy portfolios make for happy investors. To avoid getting caught in a depressed industry, skilled diversification includes companies from a good many industries, such as automotive manufacturing, building-material manufacturing, chemical and drug manufacturing, insurance, petroleum production and manufacturing, railroads, electric utilities, and retail stores. For instance, in petroleum production and refining, he must choose among Gulf Oil, Standard Oil of New Jersey, Shell Oil, Socony Mobil Oil, Superior Oil, Texaco, and many others.

How many stocks are necessary for adequate diversification? A typical investment firm owns stock in from 50 to 100 corporations, and an individual can obtain this spread merely by owning shares issued by one investment firm. An investor’s need to diversify among common stocks depends partly upon his emotions. Even for risk-takers, diversification is essential to long-term financial success.

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