Self Help

Investors with less than $10,000: If you have $10,000 or less to allocate to stocks, you may want to consider a mutual fund rather than individual stocks because that sum of money may not be enough to properly diversify. But if you’re going to invest a sum that small, consider allocating it equally into two to four stocks in two different sectors that look strong for the foreseeable future. For small investors, consider sectors that are defensive in nature (such as food and utilities).

Because any amount of $10,000 or less is a small sum in the world of stock investing, you may have to purchase in odd lots. (Odd lots mean 99 shares or less. Shares of 100 or more are considered round lots.) Say that you’re buying four stocks and all of them are priced at $50 per share. An investment of $10,000 won’t buy you 100 shares of each. You may have to consider investing $2,500 in each stock, which means that you would end up buying only 50 shares of each stock (not including commissions).

In that ease, get into a company’s dividend reinvestment plan (DRP) if it’s available. The DRP is also useful in keeping transaction costs down because the typical DRP usually doesn’t charge commissions for participants purchasing stock through the plan. For long-term investors, the DRP offers a great way to compound your investment because dividends are reinvested.

Investors with $10,000-$ 50,000: If you have between $10,000 and $50,000 to invest, you have more breathing space for diversification. Consider buying four to six stocks in two or three different sectors. If you’re the cautious type, defensive stocks will do. Does this mean that you shouldn’t in any circumstance have all your stocks in one sector? It depends on you. For example, if you’ve worked all your life in a particular field and you’re knowledgeable and comfortable with the sector, having a greater exposure is okay, because the risk is offset by your greater personal expertise. If you worked in retail for 20 years and know the industry inside and out, you probably know more about the good, the bad, and the ugly of the retail sector than most Wall Street analysts. Use your insight for more profitability. You should still not invest all your money in that single sector, however, because diversification is still vital.

Investors with $50,000 or more: If you have $50,000 or more to invest, have no more than five to ten stocks in two or three different sectors. It’s difficult to thoroughly track more than two or three sectors and do it successfully. For example, Warren Buffett, considered the greatest stock market investor of all time, never invested in Web site businesses because he didn’t understand them. He invests only in businesses that he understands. If that strategy works for billionaire investors then it can’t be that bad for smaller investors.

Invest in no more than ten stocks, because there is such a thing as over-diversification. The more stocks you have, the tougher it is to keep track of them. Owning more stocks means that you need to do more research, read more annual reports and news articles, and follow the business news of more companies. Even in the best of times, you need to regularly monitor your stocks because successful investing requires diligent effort.