My Investing Strategy: Diversification Rules!

August 27, 2009 by Guest Blogger

Tim Parker of Elementary Finance is today’s guest contributor.

When Investing, Everyone Thinks They’re Right!

If you watch any of the financial news channels or talk to any of those people who are considered the best in the financial world, one of the first things you will find is that everybody has an opinion and everybody feels that their way is the best way.

stock investing strategy

I believe that the reality is much different. While you will find a lot of people who are clearly not doing well, you will also find a lot of investors who are doing it right but who are using various approaches. While there are a lot of opinions, I can think of at least one truth that has no controversy: Use any legal investment strategy you would like but the object of the game is to make money and that is how you determine success.

My Top Stock Investing Strategies

I’d like to share with you how I do my own investing; my strategies are pretty much rooted on the basic principles of long term investing that many (if not most) investors espouse:

Rule #1: Invest with your financial goals in mind.

First let me say that I have a full time job outside of the financial world, so I’m one of countless stock investing hobbyists who enjoys participating in the stock market on the side. My primary goal for investing is to build my retirement portfolio. I’m not looking to buy a private jet or a yacht in a few years nor am I looking to one day become a full time investor (at least, not anytime soon). My strategies revolve around who I am and what my goals are. Among the many stock investing tips that are out there, apply this one first: know who you are and why you’re investing. This doesn’t seem like it would be important but I assure you that it is. It will change the way you invest.

Rule #2: Diversification rules!

If you could see how I invest, you may actually think that I’m overly conservative with my portfolio, and you would be partially correct with that assumption. The first thing I do is split up my money. For the sake of easy numbers, let’s assume that my portfolio has $10,000. (Don’t you get tired of reading those articles that give you all the best stock trading tips and investment advice for managing your $10 million dollars?) Often, when I help somebody set up a new portfolio, we start with a piece of paper upon which I draw 5 circles. This is where my “island theory” comes from.

My $10,000 has to be split into pieces. Pardon the analogy but I’m going to describe this as such: think of the pieces as 5 different islands that are far away from each other but in the same ocean. If a hurricane comes through and damages one island, the other islands are fine. Of course, because they are in the same ocean, they will all affect each other at least a little bit.

My island theory is simply an analogy for stock diversification in the investing world. This is the most important investing strategy that I follow. Don’t subscribe to information that says that you don’t need to diversify. It’s essential for protecting your assets. So let’s take our $10,000 and split it into five parts. Each of our islands is going to have $2,000. We don’t have to be exact with our numbers but we have to be close: within $100 is my general rule. You can’t take from one island to help another.

Next, each island has to look different. One island can’t be made up of computer stocks and another island made up of telecom stocks. These are all technology stocks and only one island can be based around tech.

So basically, that’s the kind of diversification I do, in a nutshell. Many people achieve great results by simply investing in index funds or a target date mutual fund. I prefer to diversify this way, by fully controlling my portfolio and picking my own stocks. I’ll follow up later to discuss what I have in my islands (or buckets), and to talk about the rest of the ways that a part time investor can make money.

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