The Confident Investor

It is important for any investor to be diversified in a range of stocks that fall in different industries. This way you are not doubling up on your risk for a segment disruption. In order to do this, you should probably have at least 20 stocks in your portfolio once it is at least partially developed.

I need to stress that last part a bit more, full diversification is not necessarily possible until your Confident Investor portfolio is at least partially developed.

As I explained in an earlier article, you should break up your portfolio money into 10 or more allotments. This means that you can have 10 different stocks fully invested at any given time.

At any given time, there are about 50 companies that are on my Watch List on this site. Not all of these companies are going to be experiencing upward momentum (a bull market) at the same time. Perhaps only a fraction of them are moving up, these are the companies that you will invest in using my Grow on Other People’s Money (GOPM) methodology.

As an example, lets assume that 7 companies are increasing in value at this time and you have divided your portfolio into 15 allotments of $6,000 each. That means you will have $42,000 invested (7 x $6,000). You will also have $48,000 sitting in cash waiting for another company to start increasing in price. As time progresses, one of these 7 companies starts to drop in price and the indicators I describe in my book, The Confident Investor, tell you to sell.  You sell enough stock in that company to recoup your original $6,000 and are left with 24 shares of the stock that are free and have not cost you any money.

Over time you will find that you have invested in many of the 50 companies on the Watch List. You will still have your $90,000 in cash but you will also have differing amounts of free stock in each company. This stock was paid for with Other People’s Money and it is now growing in your account.  In some companies you may only have 1 or 2 shares but in other companies you may have hundreds of free shares. At this point, you will find that you are quite diversified since you have free shares in several dozen companies.

Do not be fooled by guarantees: all investment has some level of risk! The key is to understand the risk and plan for it appropriately. In the case of an individual stock, the latter chapters of my book, The Confident Investor, will help you evaluate the company’s health and the appropriate timing in the market.

You need to make sure that you use a respectable stock broker to handle your transactions. The first check is to make sure that they are a member of the Securities Investor Protection Corporation (SIPC).

SIPC is the first line of defense in the event a brokerage firm fails and owes customers cash and securities that are missing from customer accounts. From its creation by Congress in 1970, SIPC has advanced hundreds of millions of dollars in order to make possible the recovery of assets for investors. When a brokerage is closed due financial difficulties and customer assets are missing, SIPC works to return customers’ cash, stock and other securities.

If you are about to entrust some of your funds with an individual or securities firm, it is worth your while to do a background check. It may save you both money and future aggravation.

The Central Registration Depository system (CRD) is a source that you can turn to for broker research. The CRD is a computerized database that holds the license and registration information on hundreds of thousands of stockbrokers and thousands of brokerage firms throughout the United States.

In most cases, a stockbroker must be licensed or registered. Some states may require insurance agents who sell variable annuities or variable life policies to be licensed. Therefore, these individuals’ records will be maintained on the CRD. The CRD will tell you about your stockbroker’s past, including employment history, securities examination scores, registration status, and disciplinary issues.