Friday, July 6, 2007

Simple Diversified and Fully Invested Stock Portfolio Strategy

Many investors (especially new ones), may have a difficult time deciding when to sell a stock. These investors may also try to time the market or time sector rotation, but often end up buying and selling stocks at the wrong times, all while making their broker rich through all the commissions they pay them.

Is there an easier way for a (new) investor?

Here's a possible strategy to make things easier:

  1. Always stay fully invested whether the market goes up or down. On average, stocks go up more than they go down, and average around 10% per year over a long time period. Even legendary investor Peter Lynch (in his book, "One up on Wall Street") says to stay fully invested.
  2. Stay diversified by choosing one stock per sector. There are around ten sectors, so that means you will be holding a portfolio of ten stocks.
  3. If you choose well, you should be choosing a stock that should outperform its sector.
  4. When do you sell a stock? It's easy. If there is a better stock in the same sector, sell the stock that you are holding and buy the better stock.

By staying fully invested, and fully diversified, with the strategy mentioned above, the individual investor can outperform the market, with low turnover and risk.

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