Q: My investment portfolio of $50,000 consists of three blue chip stocks I inherited from my parents and one bond fund. I am a conservative investor with a long-term time horizon. Do I need to make changes to my investments?
A: There are several schools of thought in investment circles regarding diversification, which is the distribution of investments among a variety of securities in order to limit losses. These schools range from the complex: wide diversification of stocks across the various industry sectors and international regions, to the simple: put all your eggs in one basket, but watch the basket very closely.
Very few individuals, or professionals for that matter, are properly skilled to place all of their money in one investment and be successful. There are exceptions to this, however, and one occurs when the single investment is the business that the individual owns and manages. But from an investment management standpoint, diversifying and spreading out your financial resources across a reasonably wide variety of investments is sensible. A major benefit of diversification is the reduction of risk. Risk in the investment markets is defined as exposure to the chance of losing money. Distributing your money among a variety of securities reduces your chance of losing money over time because different companies, industries and asset classes (stocks, bonds, real estate, cash, etc.) will perform differently during given periods of time.
Diversification is a key component to controlling risk as you manage investment assets. If growth is important, you diversify your holdings so that any single event does not eliminate the potential to reach your investment objectives over time. If income is a key consideration, you diversify the investments producing your income stream in order to better assure continuity of that income stream.
So, in answer to your question regarding the necessity of changes with your current holdings, I believe adjustments are called for in order to improve the diversification of your investments. This added diversification can come through increasing the number of stocks in different sectors that you own, and, possibly, adding another bond fund. However, the better choice for you might be to utilize equity mutual funds rather than individual stocks in order to gain greater access to a wide variety of investments.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Jay Brooks is managing director of Brooks, Moore & Associates Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.