How to spread market riskis a question that has been asked and debated for ages. Proponents of diversification can point to blown up companies like Worldcom, Bear Stearns or Lehman Brothers when they make their points on how to spread market risk. And you have to admit they have a point, just think of the employees at the three companies listed above that had substantial percentages of their net worth’s tied to the performance of these stocks as they went lower.
However, there is no simple answer to the flip side of this question. Are investors over diversified ? Do traders spread market risk just for the sake of owning more stocks ? Billionaires like Bill Gates and Larry Ellison made their fortunes by having concentrated positions. So why can’t you ?
Spread Market Risk Is A Tough Play
Well it’s pretty simple, the average investor can’t afford to take a 80 or 90 percent hit with a large portion of his or her portfolio. While owning too many stocks can become tedious and cumbersome, for the most part it reduces risk. Plus, confusing yourself with market icon’s is probably not the best path to take. i trade penny stocks
But what is the right number of names to own to appropriately spread market risk ? Is it 5, 10 or 20 ? Well, the answer is not exactly etched in stone.
Here at PSE we often issue penny stock and small cap alerts in an attempt to enhance the returns of your portfolio, but we never suggest that you put your entire account into one of our ideas. spread market risk.
A good place to start, provided you have the liquidity, is a 10 stock portfolio. This way if a large cap like Enron goes bankrupt of a hot penny stock doesn’t pan out, you still have time and money to recover. Provided of course, that you equally weight your positions and trade less than 25% of your portfolio in speculative issues.
So do the extra research that is needed to add a few more arrows to your quiver and be patient. You have your entire investment life to hit a home run. So spread market risk for now, especially with these volatile conditions.
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