A thought experiment on Diversity

For today I wanted to step outside my usual types of writing and have a discussion on a common investing tip that is often overlooked. Traditionally, it has been said that “diversity” is having your stocks split amongst varying sectors and it can prevent huge amounts of damage to your portfolio in the event one of them suffers a setback. I agree with this wholeheartedly as it seems exceptionally reasonable. Having all tech stocks would have lead to you being broke during the dot com bubble. Having all bank stocks in 2008 would have made you contemplate killing yourself I’m sure. So having a solid spread seems like a fine way to prevent that from happening.

     So why if this is such common knowledge (and it seems to be) why should I bother discussing it? Well, as you know I enjoy watching Mad Money as it has lots of lights and sounds and keeps my attention. A while back Jim Cramer discussed a new method of diversity which he claims is better than the sector splitting. While I’m not entirely sure if that’s true or not, I do think it is worth looking into. So what is his method? It’s to diversify by style of stock, such that no matter what kind of market we’re in, one of your picks is likely to be a winner. He then classifies his styles you need into:

1.       A Growth stock

2.       A foreign stock

3.       A high-yield dividend stock

4.       A speculative stock

5.       Gold

This all seems simple enough. So I thought to myself, why ought I to choose between whether or not one method is correct? I decided to just do both. And for bonus pseudo diversity, all my stocks are paying dividends so I get that extra level of market protection as well. Hot Damn! So combining the two it means I’m going to want the 5 stock types listed above, but also ensure that no two stocks are in the same sector or trade together. Seems easy enough right? So here’s what I’ve compiled (While I don’t own all of these yet, I will before too long I imagine).

1.       A Growth Stock – For this I chose Wal-mart as it runs its business regardless of economic booms/busts. Plus, Dividends!

2.       A Foreign Stock – On this one I am opting for Vodafone which is on my watch list. Being a telecom it doesn’t share a sector with Wal-mart and it also pays me cash. I  also still looking into Square Enix, although I won’t likely have any more information on that for a few days.

3.       A High-Yield Dividend Stock – For this one I am using my shares in Intel. Tech sector with a 4.2% yield seems good to me.

4.       A Speculative Stock – This for me was the hardest one as most spec stocks don’t pay a dividend so that really messes up my initial strategy. I do like Jet Blue as it’s an airline (different sector) who is up and coming with tons of projected growth. Plus if you check out their site and info (conference calls, etc.) this company and their planes just seem like a flyers dream come true. However the lack of dividend kills it for me. My backup option which sadly also doesn’t pay a dividend is SciClone Pharmaceuticals. They are working on some great new drugs to fight Cystic Fibrosis, as well as a multitude of cancer types.

5.       Gold – I am personally to poor to buy gold. So instead I just replaced this with Silver. I buy in bullion form since physical is better than every other option (it’s not even close) and while there is no dividend, well what can you expect?

So there is my hypothetical portfolio strategy (if I go the Cramer route, which I may try at some point) with my stocks consisting of a few great options and a pure gamble. If nothing else, this is an enjoyable thought experiment to get you as an investor to consider just how well diversified your portfolio is and what you could do to fix it if it isn’t. As far as I can tell, I seem to be on the right track with five stocks of which each will only hold a 20% total of my portfolio in five sectors and five different styles. So till next time, embrace diversity my friends! And not just in your portfolio!

                -D

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2 Responses to A thought experiment on Diversity

  1. Wow, amazing blog layout! How long have you been blogging for?
    you make blogging look easy. The overall look of your site is excellent, as well
    as the content!

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