FFB-Post 27
“Never put all your eggs in one basket.” This age-old wisdom is at the heart of portfolio management. Diversification isn’t just a strategy; it’s a necessity.
Warren Buffett once said, “Diversification is protection against ignorance.” Even the greatest investors understand that no one can predict the market completely. Here are some key rules to help you diversify and manage your portfolio effectively:
Rule 1: Start with Fund Allocation
Determine how much money you’re willing to invest now and how much to set aside for future opportunities. Consider Warren Buffett’s strategy—he liquidated his investments in 1969 and avoided the market crash between 1971 and 1974. Fast forward to today (Aug 2024), and Buffett’s Berkshire Hathaway is sitting on a cash reserve of over $200 billion, ready for the right opportunity.
Rule 2: Never Put More Than 10% in Any One Stock
A well-balanced portfolio typically contains 15-20 stocks. To mitigate risk, no single investment should exceed 10% of your total portfolio value. Ideally, aim for around 5% per stock. This ensures that even if one stock underperforms, it won’t severely impact your overall portfolio.
Rule 3: Assign Higher Weightage to Stronger Stocks
If you have a high level of confidence in a particular stock, such as a Grade A stock, you might allocate 10% of your portfolio to it. For a Grade B stock, you might allocate 8%, and so on. This approach allows you to invest more heavily in stocks you believe in while still maintaining diversity.
Rule 4: Review Your Portfolio at Least Once a Year
Stay informed by reading the annual reports of the companies you’ve invested in. Quarterly reports are also important for keeping a pulse on how your investments are performing and ensuring they align with your long-term goals.
Rule 5: Don’t Sell Based Purely on Price
When considering selling a stock, think about the business’s performance, not just its price. Consider it like evaluating your job or deciding to fire an employee: Is the business meeting your expectations? Is it progressing? If the sector is stagnating or the company’s future looks uncertain due to innovations or industry changes, it might be time to move on.
I want to end this series by remembering Benjamin Graham’s words: “Investment is most intelligent when it is most businesslike.” Think like a business owner, not just a stockholder, and build a portfolio filled with great businesses. By following these rules, you’ll protect your investments and position yourself for long-term success.
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