Gather Little by Little

Photo of Taipei 101 by umm

The following is a guest post by Becky at Family and Finances, a blog about finances and saving money. If you like this post, consider subscribing to her feed via RSS.

Remember the tech stock boom and, later, the bust? Doesn’t it bear some resemblance to the housing boom and, now, bust? In both cases, investors put too many eggs in one basket, and that basket broke.

Obviously, the key to successful investing is to diversify your investments. Here are some tips:

Do not hold more than 10% of your assets in one single company. This is easily done with mutual funds, which invest each of your shares in multiple companies. Of course, the rule also applies if you’re investing in stocks, bonds, or other securities. I personally prefer to keep less than 5% of my assets in a single company through mutual fund investing.

Get out of your employer’s company stock. The 10% rule holds true for the company you work for. A lot of companies pay profit sharing, 401(k) company matches, and bonuses in the form of stock in that company. Find out if you can move that to a mutual fund or other security. A lot of the time you can.

Many people have faith in or loyalty to their employers and like to own a large percentage of company stock in their retirement plans. I really feel that this is a bad idea. What happens if your employer goes bankrupt (think Enron)? Not only would you lose your job, but your retirement plan would tank as well! This is why I recommend keeping a maximum of 10% of your portfolio in your employer’s stock.

Be wary of the next big thing. It’s easy to agree to limiting your exposure to tech stocks and real estate; you’ve seen what can happen. The hard part is remembering that this same thing can, and probably will, happen in the next booming sector.

I’m not saying you should completely avoid industries that are performing well, but by limiting your exposure to any single sector, no matter how “hot” it is, you’ll avoid being decimated in the bust. In fact, while the recently “hot” industry is going down, one of your other investments will probably be going up! The key is to diversify.

Now here’s the fun part. Let’s hear some predictions! What do you think the “Next Big Thing” will be in investing?