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Stocks 501: Constructing a Portfolio

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1.
If your circle of competence in investing is within the software industry, then it is a good idea to have all the stocks you own be in the software industry.
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False. Having your portfolio fully weighted in one industry can expose it to a lot of risk.
2.
The more diversification in your portfolio, the better your chance of beating the market.
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False. After a certain number of stocks (12 to 20), the effect wears down. However, it will reduce your overall risk.
3.
If an economic event affects every single stock in the country, it is likely an example of _______ risk.
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Systematic. Systematic risk is the type that affects all stocks, not those of a particular company. It cannot normally be diversified away.
4.
What is a good rule of thumb for deciding how to weight the stock holdings in your portfolio?
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Use your confidence in each of the stocks as a guide. Be certain that the highest-weighted stocks are the ones you feel the most confident about.
5.
If you plan to add a mutual fund or two to your stock portfolio, what is a good way to start looking?
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Look for gaps in your portfolio. Looking for gaps will help you identify countries and sectors that your portfolio lacks. They could be lucrative.
6.
How many stocks do you need to own in your portfolio to derive 90% of the benefits from diversification?
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12 to 18. Ninety percent of the benefits of diversification are achieved by holding 12 to 18 stocks.