It’s morning. You roll out of bed and stagger to the coffee pot. Maybe you turn on the news and hear something like this: market is down today and the Dow has dropped 50 points. As you pour that coffee into a trembling cup, you might think, "There goes my portfolio and it’s only 8am."Â
Since the Dow (Dow Jones Industrial Average) is one of the most common indices quoted on the news, it’s good to know what the Dow is: the Dow is comprised of 30 well–established, household name U.S. Companies. It’s one of the oldest indices, around since 1896, but with only 30 stocks, this is a small sampling of the total market.Â
If your portfolio has more than 30 securities, you may not experience that level of volatility in the original scenario. If your portfolio has less, you probably experience more. Diversification is a way to reduce (but not eliminate) risk by increasing the number of stocks. If you invested in every stock on the planet, you could have well over 10,000 stocks in your portfolio.Â
Your response to daily news can squash your portfolio and take you off track. If every time you hear of a drop you sell, you won’t be invested when the market recovers and you can miss the best days of the market.Â
As the wife of a planner, I enjoy learning about the number of stocks in a portfolio. Obviously, it’s not just a numbers game; asset allocation is crucial. I leave complex allocation decisions to the Certified Financial Planner™ professionals, but, if you are interested in understanding the risk in your portfolio, here are some questions worth asking:
- How many stocks are in my portfolio?
- Is there an option that keeps the number of stocks in the portfolio high for diversification, while matching our risk/return goals?Â
- How does asset allocation help identify the risks that are worth taking?
- How does missing the best days of the market impact my portfolio?
Keeping these questions in mind when you speak with you planner allows you to invest wisely.Â
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