Stocks and diversification

When I got into the stock market the bubble was about to burst. Of course I didn’t know that, so I bought equities like Tyco, Sun Microsystems, etc. Needless to say, the bubble burst hurt.

Recently I’ve been reading a lot about how diversification can reduce risk. Risk is only reduced when your investments don’t follow each other. For example, it didn’t really matter if I invested in the S+P 500 or Tyco and Sun Microsystems and a handful of other stocks. Their performance is not all that different, especially over long periods of time.

What you can do is buy some domestic stock: I have FDP (as I mentioned on Jan. 15), as well as Pfizer, Fleet, Tyco (leftover from the bubble) and a handful of others.

You can buy some REITs: a real estate one that I like is HCN, but I recently sold as the stock kept going up and the dividend was down to 8% or something. I put the money that had been in HCN into a mortage REIT, IMH (I wrote about it Jan. 13). Its dividend is better.

Precious metals: I have IAG and WHT.

International stock: I have EFA and hope to scrape together some money to invest in Korea’s KOSPI index.

Bonds: I have none, but they’re supposed be safe and steady.

The idea is that US equities, precious metal stocks, REITs, foreign stocks, and bonds do NOT track each other. They don’t behave the same way. If one goes down the others may not.

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