Stocks and mu­tual funds

The Covington News - - BUSINESS -

Like most peo­ple, you prob­a­bly grav­i­tate to­ward things that you’re familiar with and that you like. If you en­joy classical mu­sic, your shelves may be full of Beethoven and Ravel. If you love pasta, your cup­boards may be bulging with spaghetti and ravi­oli. In most parts of your life, there’s noth­ing wrong with this type of de­vo­tion — but if it ap­plies to your in­vest­ment port­fo­lio, you could run into prob­lems.

Specif­i­cally, you don’t want to own too many of the same types of stocks or mu­tual funds — even if you like th­ese in­vest­ments and are gen­er­ally pleased with their per­for­mance.

What’s wrong with “the more, the mer­rier” approach to in­vest­ing? Sim­ply put, it’s too risky. Sup­pose you owned only stocks of com­pa­nies that be­longed to the same in­dus­try, or to a cou­ple of re­lated in­dus­tries. If a par­tic­u­lar set of eco­nomic or mar­ket forces should hurt th­ese in­dus­tries, then your stocks would take a hit — and if most of your in­vest­ment dol­lars were tied up in th­ese hold­ings, your over­all port­fo­lio could take a hit, too.

You might think you can avoid “over-con­cen­tra­tion” by in­vest­ing in mu­tual funds. Af­ter all, mu­tual funds may in­vest in dozens of com­pa­nies at any time, so aren’t you pro­tected from any in­dus­tryspe­cific down­turns? It’s not that sim­ple. There are many types of mu­tual funds avail­able, and some of them con­cen­trate in a par­tic­u­lar mar­ket seg­ment, such as tech­nol­ogy. When some­thing af­fects th­ese seg­ments, such as the burst­ing of the tech­nol­ogy “bub­ble” in 2001, th­ese types of mu­tual funds can be harmed. If you owned just one tech-heavy fund at that time, your over­all port­fo­lio prob­a­bly wasn’t shaken up too much, but if you had sev­eral of th­ese funds, you would def­i­nitely have felt some pangs of re­gret when you opened your in­vest­ment state­ment.

Keep this in mind: Dif­fer­ent in­vest­ments may re­spond dif­fer­ently to the same mar­ket forces. To give just one ex­am­ple, a steep rise in in­ter­est rates may hurt the stocks of fi­nan­cial ser­vices com­pa­nies but have rel­a­tively lit­tle ef­fect on phar­ma­ceu­ti­cal stocks. On the other hand, cer­tain le­gal or reg­u­la­tory changes can have a big im­pact on drug com­pany stocks but not cause a stir in the fi­nan­cial ser­vices in­dus­try. Con­se­quently, if you spread your in­vest­ment dol­lars among dif­fer­ent types of stocks and mu­tual funds, you’ll be less vul­ner­a­ble to those forces — all be­yond your con­trol — that may af­fect one par­tic­u­lar class of as­sets.

Here’s one more rea­son to ex­pand your in­vest­ment hori­zons: You prob­a­bly won’t be able to achieve all your fi­nan­cial goals if you own only one type of in­vest­ment, such as growth stocks or growth-ori­ented mu­tual funds. Over time you will have other con­sid­er­a­tions, such as the need for in­come, so you’ll need to ad­dress this in your port­fo­lio. Th­ese fac­tors also af­fect the way you approach your 401(k) or other em­ployer-spon­sored re­tire­ment plan. You may have a dozen or more in­vest­ment op­tions in your plan, so don’t just stick with one or two of them.

Joe Stier

In­vest­ment Rep­re­sen­ta­tive

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