Diversifying: 5% only rule

[podey]

For convienence's sake I have 99% of stocks and mutual funds at Fidelity (one outlier mutual fund at TRowe which I would love to consolidate to Fidelity, but it actually returned 14% last year and I don't want to pay the cap gains tax to sell and don't want to transfer because it's not a "no-fee" fund at fidelity). Other than that I use GMAC for Demand Notes for cash. Returning 5.75% right now, not bad

 

[Meadbh]

Ford and Chevy? aka - Vanguard and Fidelity?

Couldn't resist!

heh heh heh -

No, because I do not live in the US.

 

[jazz4cash]

Orchidflower:

WRT diversification and 'not putting too many eggs in one basket', it is standard practice to limit investment in any individual stock to a maximum of 5%. That way your risk of loss due to the failure of an individual company is limited (think Enron)

One 'exception' to the 5% rule that I've heard sometimes is if it is stock in the company you work for, you could allow 10% max instead of 5%.

A mutual fund, by definition is said to be non-diversified if it has less than 20 stocks in it's portfolio (or maybe it's 5% max in any one stock). Nearly all mutual funds strive to be diversified.

Putting all your money into a singe mutual fund like an S&P 500 index fund is not a problem (as far as the 5% rule) because it is composed of 500 individual companies. The issue is that they are all large-cap companies, so many folks would prefer a TOTAL Stock Market Fund which I think is 5000 companies so it includes some small and mid-size companies.

So most people IMO use at least a few mutual funds in order to achieve an asset allocation (stocks/bonds/cash) they are comfortable with. Probably the closest thing to a single fund solution is a 'target retirement' fund and many folks around here probably wanna tweek that too!

 

[Milton]

WRT diversification and 'not putting too many eggs in one basket', it is standard practice to limit investment in any individual stock to a maximum of 5%. That way your risk of loss due to the failure of an individual company is limited (think Enron)

Personally I don't think much of such [-]intellectual shortcuts[/-] rules of thumb. As with almost everything else in life, there are many factors to consider and "it depends".

There are many tiny companies that I would be loath to invest 5% of my portfolio in. On the other hand, there are some large companies, internally diversified across multiple industries and geographies, that I would be quite comfortable investing 10% in (e.g., GE or Berkshire Hathaway).

One 'exception' to the 5% rule that I've heard sometimes is if it is stock in the company you work for, you could allow 10% max instead of 5%.

I would argue the opposite: if you work at company X, you are already exposed to its future success / failure, and have no need to compound that exposure by investing in its stock. An exception could certainly be made for those high enough in management to have inside information about the companies' prospects (although such executives are typically subject to trading restrictions).

 

[jazz4cash]

Personally I don't think much of such [-]intellectual shortcuts[/-] rules of thumb. As with almost everything else in life, there are many factors to consider and "it depends".

There are many tiny companies that I would be loath to invest 5% of my portfolio in. On the other hand, there are some large companies, internally diversified across multiple industries and geographies, that I would be quite comfortable investing 10% in (e.g., GE or Berkshire Hathaway).



I would argue the opposite: if you work at company X, you are already exposed to its future success / failure, and have no need to compound that exposure by investing in its stock. An exception could certainly be made for those high enough in management to have inside information about the companies' prospects (although such executives are typically subject to trading restrictions).

No argument here on either of your points, but don't believe they address OP's question very well. BH is often considered a diversified mutual fund within itself....same for GE.

As for investing in your employer's stock, my take is more that it's a matter of receiving options and/or match in company stock, etc as well as being.