More Things Investors Should Avoid Doing

Diversification does have its limit
One of the most, if the most acclaimed principle is diversification. Even though this is true, there is not a lot of chance that the common investor will be influenced enough to carry on inadequate diversification. The terrible things that can happen to investors that place all their eggs in one basket are in many occasions over exaggerated.

Someone once mentioned that very few people, nonetheless, focus enough thought to what can happen if too much diversification is practiced. This is the funky things that can occur by having all your eggs so spread out all over the place that a lot of them end up actually outside of the baskets after they have been put inside of them. For instance, for some investors that have stock holdings and that have a market value of around half a million dollars, the amount of investors that own twenty or more different stocks is outrageous. The amount that these people have is not actually what is so outrageous but it is that most of the times only a little percentage of those holdings is in nice looking stocks that the investors or the advisors have a lot of knowledge about. Investors have been told so much that diversification is a must that they are afraid to place too much into a company they thoroughly about and this has lead them to put way too much in a bunch of other companies they do not know hardly anything about. It does not seem to come to them or to their investors that purchasing a company without knowing enough about the company in itself might be even more dangerous than having insufficient diversification.

So how much diversification is really needed and how much can get to a point to where it can actually be dangerous? In the case of stocks one thing to keep in mind is that the nature of the stock has a lot to do with the quantity of diversification that is going to be needed.

Certain companies, like almost all of the biggest chemical manufacturers, have a good amount of diversification inside the company as it is. Even though all of the products of a company might be classified as a specific thing, a good amount of those things might have most of the attributes found in products that come from totally different industries. There are others that may have totally different problems with manufacturing or they might be sold against different competition to diverse kinds of customers, etc. Besides this, sometimes when only one kind of product is involved, the customers might be in such a large section of the industry that a good amount of the element of internal diversification might still be something that is there.

The extent and the strength of the management personnel in a company, that is, how much a company has got off its feet and gone away from managements of only one man, as these are also vital factors in choosing how much diversification safeguard is essentially required. Then holdings that are in very cyclical industries, in other words, the ones that fluctuate very sharply with changes of circumstances of the business cycle, also intrinsically need to be balanced by a rather greater diversification than the shares in lines that are not as subject to this kind of irregular fluctuation do.

The diversity between the quantities of inside diversification that can be found in stocks makes it very difficult to place out down hard and fast regulations as to the least amount of diversification that the average investor needs in order to obtain the best results. The relationship between the industries that are implicated is also an aspect. For instance, an investor that has ten stocks in the same amounts, eight of these which just so happen to be bank stocks, might have totally insufficient diversification. On the other hand, the same investor with each of his ten stocks in a totally different industry might have much more diversification than he actually needs to have.

Being able to see that each case is an individual situation and that there are not any exact regulations that can be set, the following is suggested as a rough lead to what could be seen as a minimum diversification needs for everybody except for the smaller kind of investor.