| A few weeks ago, Cora and I chose a stock to purchase through the E-ZVestsm service here at BUYandHOLD. We decided we wanted to "own" part of this company. The decision was based on our research of the company's history and their financial strength. We also took a good look at news about the company's future plans, and the projections based on past performance.
We chose the E-ZVestsm service for our investment strategy, since we don't want to spend our valuable time watching fluctuations in the market right now. Cora has only a few weeks left in her school year, and we're busy planning our summer vacation. If you remember, we spent last summer at home losing money playing the stock market. This year, we want to play other games while we let our money work for us through smart investing.
After we made the decision to invest our money automatically in this dollar-cost averaging strategy, Cora looked at me and asked, "What about the seesaw, Mom?" She had a Cheshire Cat grin on her face.
The seesaw analogy came to me when I first began writing this column. After last year's fiasco with my stock investments, I'm determined not to repeat my mistakes. One of the mistakes was frequent trading with a lot of transaction fees. The E-ZVestsm service at BUYandHOLD takes care of that problem. Even if we purchase once every week, the monthly bill is less than one single trade at many brokerages.
The other problem I had was investing in only one sector of the market. I didn't diversify our portfolio. This time, we're going to invest a little at a time, and we're going to branch out with a few stocks in different sectors.
As I was explaining this to Cora, she became confused over the diversification part of the plan. I tried to explain it to her by using a seesaw as an analogy. I told her that a sector was one of the categories in the BUYandHOLD research area. Each one was like a person, with special talents and ideas. The stocks within a sector made up that's sector's personality. Technology is a sector/person, and it's different than the sector/person of Consumer Goods.
At this point, I was feeling pretty smug about my explanation. I told her that when you invest all your money in one stock of a sector/person, this was a pretty risky deal. Stocks and sectors go through phases of being popular or ignored. Sometimes they have something to offer to everyone, and sometimes they make mistakes, just like humans.
I was on a roll. "If you put all your financial eggs in one sector, Cora, that's a lot like putting one person on a seesaw. If they sit in the middle, they can balance the board, but if they sit on the end, they'll stay on the ground. They need another person to help them balance."
Cora was quiet, so I continued. "The same idea applies to our portfolio. Diversification helps balance and strengthen our investments."
Cora finally spoke up, " Mom, I don't understand...If you put one person on each end of a seesaw, then all you do is go up and down. You really don't go anywhere."
She had a point. Then she giggled, "And being on one of those big swings is a lot like the way you used to do stocks. You would go back and forth and up and down a lot real fast. You can fall off and hurt yourself or throw up."
This was going nowhere on my end. I sighed and gave up. I couldn't think of an analogy to help explain diversification to her. As it turned out, I didn't have to worry - she explained it for me, and she did a remarkable job.
"I think I know what you mean, mom," Cora said. "Owning stocks in different categories is a lot like playing soccer. You have so many people on a team to start the game. Each player is a different person and they all have different things they can do better than others. Some can kick and others are better at being goalkeepers. One person can't do it all. It takes a team to make it work."
It was my turn to be quiet, but not out of confusion. Cora joined a new soccer team this past year, but I didn't expect her to make a connection between this sport and investing. I was amazed as she continued, "The coach has to be careful and help us plan what we're going to do so we can win. She tells us when we're going to play, and what position we're going to be in for each period. So we're like coaches and our portfolio is like our team."
Wow. Having a diversified portfolio is a lot like coaching a team. When we diversify, we're buying individual strengths. With too few stocks, we don't have enough for safety. On the other hand, when we have too many stocks, we can't concentrate on each individual player. The concept of the team is diluted when there's not enough attention to go around.
A good way to learn how to spot a strong team player for your portfolio is in the article, "Drip Port Investing Criteria" at the Motley Fool. There are eight points to follow to "interview" your stock choices for your team. Or, just go to the Top Ten at BUYandHOLD to choose a few stocks from different industries. There's security in numbers, and these companies made the Top Ten out of 4,000 stocks available at BUYandHOLD. This means they already made it through some stringent reviews by folks with the buy and hold philosophy.
A few weeks ago, I congratulated Cora when she made this great analogy for diversification. Today, I was still staring speechless at the braces on that wicked grin. So I said the only thing I could say at the moment:
"Ok, Coach," I said. "Where do we go from here?"
Until next week.
Linda Goin |
