This week’s theme is the immutable principles of successful investing.  Successful investing for the long-term requires discipline and sticking to a set of unchanging principles, and today’s immutable, unchanging principle is:

Diversify your stock portfolio by geography, industry, and company size to reduce your risk.

The goal with diversification is to have enough variety that all of your investments don’t move up and down together in tandem. Even the best investors in the world make mistakes, so it’s important that you spread the risk of loss around among different types of investments.

Diversification can be made over-complicated by others in my profession, so I want to give you a more simplified way to achieve diversification in your portfolio.

First of all, let me just say that you don’t need a bunch of fancy asset classes in your portfolio to be successful. You don’t need to invest in gold, other precious metals, real-estate investment trusts, and the new-fangled investment du jour (ahem, bitcoin) to be diversified.

In fact, several successful investors are known for abandoning traditional views of diversification all-together. Warren Buffett, chief among them, who prefers to go big or go home and has been successful, largely because of the home runs of very few investments.

But since most of you listening are not professional investors, you’re going to have to settle for a little more diversification than Mr. Buffett.

So when it comes to your stock portfolio, share with you my 3 principles for diversification:

#1: Don’t have all of your eggs in the U.S. basket. I see many investors who have virtually no holdings outside of U.S. focused stocks. There is a tremendous amount of opportunity outside of the U.S. for investors, so make sure at least a portion (but no more than 20-30% of your portfolio) is invested overseas.

#2: Diversify across several industries. If I see a bias towards any one particular industry right now, it’s tech. But if you are too concentrated in 1 or 2 industries, you can get burned. Tech has been burned before in the dot-com bust, and it will surely get burned again. Financial stocks in the 2008 great recession, and oil stocks over the last few years have been burned as well.

#3: Make sure you own investments that differ in company size. Your portfolio shouldn’t contain just the largest companies, but should also contain mid-size and small companies as well, which have shown historically to behave differently than their large-company counterparts.

That’s it for today. Tomorrow, we’re going to recap the week and I’m going to give you a little preview of next week’s theme.

My name is Ashley Micciche and this is the One Minute Retirement Tip.

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