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Stocks 501: Constructing a Portfolio

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1.
What's the largest potential problem with owning too few stocks?
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You run the risk that one bad stock pick could produce an extremely large loss. If you hold too few stocks, you run the risk that one bad stock pick could produce an extremely large loss. For example, if you owned three stocks, each worth one third of your portfolio, and one of your stocks went to zero, your portfolio would lose one third of its value. Swinging only at fat pitches is good, not bad.
2.
You can increase your odds of beating the stock market index performance by _______.
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Holding fewer than 20 stocks in your portfolio. If you hold a diversified portfolio, on average you should expect to achieve a market rate of return. By holding a concentrated portfolio you increase your chances of obtaining a better return than the market, but at the same time, you also increase your risk of obtaining a lower rate of return than the market.
3.
Instead of asking whether stocks or mutual funds would be better to have in your portfolio, a more strategic question might be, _______.
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How can my portfolio benefit the most from each of these investments? Though you may ultimately decide to stick with either, you should ask the question anyway. You may be surprised at the answer.
4.
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.
5.
The concept of portfolio weighting refers to _______.
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The percentage of your portfolio that each stock occupies. The percentage is where the weighting comes in.
6.
If you decide to follow your circle of competence, your stock selections will gravitate to _______.
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Either of the above. Either or perhaps both. But it is probably not wise to invest your entire portfolio that way.