Investing In Stocks - Why You Should Avoid Having A Small Portfolio Of Shares
A lot of people start investing in stocks because they are naturally drawn to the idea of making money
. For that reason they will often do their research in order to find or two really promising companies that they can put their money in to in order to make big returns. However this is very often a flawed strategy.
It's all too easy to be excited about young start-up companies because if they come good in future years, they could easily double, treble or quadruple your money. However the reality is that most of these 'jam tomorrow' companies will never make it big. Some will remain very small companies whilst others will simply run out of money and go bust. So as an investor you will often find that your long-term investment makes no money at all or it ends up being completely worthless if the companies you invest in go under.
This is why it's not generally a good idea to put your money into just a small handful of companies. Okay you may see huge returns if one of them develops into a large and hugely profitable company, or is taken over by a larger competitor, but you may also lose a huge chunk of your capital in the more likely scenario that they don't make it.
I personally think the best strategy as an investor is to invest in a large number of different stocks (across a number of different sectors) so you spread your risk and protect yourself from any major losses. That way you can afford to put your money into a few of these small-cap stocks because you know that your portfolio will not be too badly hit if these companies never fulfil their potential.
Furthermore if you assign most of your portfolio to good quality mid or large-cap stocks, you should benefit from regular dividend payments. This also cushions any losses you may incur from these smaller stocks. Plus it's also worth noting that many of these young fledgling companies do not pay any dividends so you are relying purely on capital growth.
Anyway the point I want to get across is that stock market investing is not easy. It can destroy your capital very quickly if you're not careful, and this is particularly true when you only invest in a small number of companies. Successful investing is all about risk management. You need to think like a fund manager and make sure you never expose yourself to too much risk, particularly in these highly volatile markets.
by: James Woolley
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