Financial Tip of the Month
January 2006

Diversification means not having everything invested in one stock, or one class of stock, or even one type of asset. It’s important because it reduces your risk of loss if disaster hits that one particular investment.

For example, perhaps you work for a business that’s doing well. The company’s matching contributions to your 401(k) plan are in company stock. You’ve been granted some stock options and you’ve bought more stock for your own account. Everything seems to be going well.

But what if the business fails or faces some other disaster? You could lose not only your salary but much of your savings too. Because you haven’t diversified, your financial well-being depends on one specific business.

Diversification can have a second benefit. It can reduce the variability of the returns you get from your investment portfolio. That’s because not all investments rise or fall at the same time.

For example, stocks may be down but bond prices might be up. Or stocks of auto makers might be falling when oil company shares are rising.

Here are some diversification guidelines:

• Don’t invest everything in just one stock. That’s especially true if the stock is the company where you work. If something bad happens, you could lose your job as well as your savings.
• If you invest in individual stocks, financial theory suggests you should hold at least 12 to 15 stocks for good diversification. Choose companies from different industries.
• Investing in a mutual fund will spread your risk among many different companies. But you could still be at risk if the mutual fund specializes in one particular industry segment. You may need to hold a variety of mutual funds for better diversification.
• Try to diversify among different asset classes, such as stocks, bonds, and even real estate. If you own your home, remember that represents an investment in real estate too.
• Finally, while diversification is important, it is only one of many factors to consider in choosing your investments. Your overall investment strategy should also take into account such things as your age, financial situation, retirement goals, and risk tolerance.

Ciuni & Panichi, Inc.
Certified Public Accountants & Business Consulting Firm


25201 Chagrin Boulevard
Cleveland, Ohio 44122

(216)831-7171
Fax:(216)831-3020

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