Stock
Investment Diversification
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Why is Diversification Important?
We are all familiar with the age-old
adage, "don't put all of your eggs in one basket."
Why? Because if that basket drops you lose all your eggs -
a sorry state of affairs if you are relying on those eggs
to see you through a week's worth of meals.
Most financial planners advise their
clients to diversify their investment holdings. By blending
your investments you increase your odds of weathering a nasty
downturn without wiping out your nest egg. Of course, there
is a downside to diversification. That is, when times are
good, as they have been for the past decade or so, a diversified
portfolio will limit your upside return. In essence, you will
not fully participate in a raging bull market because you
are not fully invested in stocks when stocks are rocketing
higher with each passing day.
Holding cash, bonds or other conservative
investments will definitely reduce returns when the stock
market is hot. Overall, however, most investors are willing
to sacrifice some of the upside in order to sleep well during
times of downturn or uncertainty.
Should I Invest in Technology Stocks?
Most financial planners recommend
a diversified portfolio of stock investments. A stock portfolio
dominated by technology stocks will tend to be much more volatile
- and risky, than a more balanced portfolio. Stock volatility
means that returns tend to be less predictable than those
of more conservative investments. Returns will be high during
good times and losses will be accentuated during bad times.
Stock volatility has a disruptive effect on compounding and
exposes an investor to significant risk..
It is generally true that growth
stocks (which typically include technology stocks) hold up
better in a recession than their cyclical counterparts. However,
when tech stocks stage a massive retreat, as they have done
on more than one occasion, the downside can be devestating
for an undiversified investor.
Risks notwithstanding, technology
stocks are likely to continue to play an important role in
improving the productivity of the economy. As such, many technology
stocks will far outperform the market averages. The challenge
comes in picking the right stocks. Alas, until a more reliable
crystal ball is developed, most investors will pick their
share of winners and losers. So, while there is definitely
a place in most investment portfolios for technology stocks
it is wise to stay diversified.
Stock
Market Definitions
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