Risk Mitigation – # of stocks, $ Limits,
You are going to make mistakes – It’s a fact of investing! This is why in addition to Diversification of your stocks you should practice what I like to call “Risk Mitigation”. This entails investing in a large number of stocks to avoid concentrating too much of your money into any one stock.
There are many investors that argue against owning more than a dozen or so stocks stating that there is no need or quoting sources such as Warren Buffet and other big name investors. They also state that owning too many stocks will only serve to bring your returns down. I would have you consider this though; these are the same folks that say you should own an S&P Index Fund containing 500 stocks! Also consider that Warren Buffets Fund contains at least 45 publicly traded companies and many more privately held companies.
Things have changed with technology – An investor can easily keep track of 75 to 100 stocks ( I do) and the reason is technology. I can get real time alerts from by broker by simply setting them up in the control panel, I can get alerts from the companies themselves, from sites that let you set up portfolios and I can even get News Feeds since directly to me by RSS. It’s not like the old days when you had to wait until the next day to read about it in the newspaper and then try and phone your broker at the same time hundreds of others were doing the same.
Some basic ways of limiting your risks are:
- Spread your investment out over a large number of stocks ( How many depends on how much)
- Limit your investments in riskier stocks – I allocate less money to riskier investments
- Use the dividends of the riskier stocks and use them to purchase “safer” stocks – This is a great way to use the income from riskier but higher yielding stocks to fund safer stocks.
- Monitor your stocks closely for signs of trouble –
When purchasing a stock have the intent of owning it forever.
Here is how your risk is mitigated using a larger number of stocks.
Say you have $100,000 to Invest.
If you buy only 10 stocks @ 10,000 each and the unthinkable happens – You could lose $10,000
If you buy 20 Stocks @ $5,000 each and the unthinkable happens your lost would be $5,000.
Of course we don’t want to lose money but it helps you sleep better knowing only half as much is at risk by buying more stocks! All by increasing the number of stocks and lower the percentage of our money invested in each we have reduced our risk exposure of each stocks by 50%.
In one of my portfolios I own 100 stocks – with only 1% of the portfolio allocated to each stock I only have 1% at risk for each stock. That means that I could lose every penny of one particular investment and still retain 99% of my portfolios value.
Of course there are also other ways of providing risk mitigation for your self, like having multiple checking , savings, and brokerage accounts but that is a topic for another article so stay tuned for these ideas and much more!
As always your thoughts and comments are welcome. Please join in to the discussion.