Diversification

True or False: If you buy enough different stocks, you can diversify out all risk in the stock market.

• True

• False

Diversification is good because:

• It focuses investments on a single stock to take advantage of growth potential

• Mutual funds have higher fees than individual stocks

• Interest rates rise and fall

• It spreads the risk of investment

A personal investing plan:

• Should be prepared every six months by a different financial advisor

• Is a good way to build toward a financial goal

• Will always have funds from a single mutual fund company

• Will focus on small-cap stocks for those people who do not like risk of any kind

Long term investors:

• Sit tight through bull markets and bear markets

• Buy and sell on a daily basis

• May adjust their holdings to sell when others are selling and markets are falling

• Always lose money in the long run

A bear market:

• Is when people rush to buy stocks, sending prices surging upward

• Is when bond prices and interest rates are not as attractive as the growth in the stock market

• Can be an opportunity for long term investors to buy stocks of well run companies at lower prices

• Happens every year at about the same time, and can be avoided with proper attention to the calendar

Growth stocks:

• Are mainly good investments for those who need income from dividends

• Are those with a market capitalization of between $2 billion and $200 billion

• Are easily identified because they are everyday household names

• Require research from an investor, pour most of their income back into growing the business, and have the potential to do very well as part of a portfolio

Market capitalization:

• Is the difference between the 10-year high and 10-year low of a stock

• Is the total number of outstanding shares of a company's stock multiplied by the stock price

• Does not change once you buy a stock

• Is $2 billion to $200 billion

A defense stock:

• Is part of the manufacturing sector that sells to the Department of Defense

• Is owned by a company that is currently having a strong downturn

• Is the type of stock that holds a steady value, such as an insurance company

• Has a small market captialization

Over about 40 years, your portfolio should probably:

• Change from higher-risk to lower-risk investments

• Sell every holding each year to figure out how well you are doing

• Grow equally well in all sectors, or it is a bad financial plan

• Become less and less conservative, increasing in risk from year to year

Your return with a diversified portfolio will:

• Be exactly 11.3% every year

• Rise and fall, but have less risk than a smaller number of stocks and a smaller number of sectors and asset classes

• Fall if a single company in your portfolio goes out of business

• Beat absolutely every other investor