10: The Essential Rules for Beating the Market

Chapter 8. Stay Diversified

"If you assume the worst is possible, you will never be surprised."

Equation 8.1. 

At this point, you have learned how to use fundamentals and technicals to find the right stock at the right time to buy. You have learned how to set an exit strategy and not to get emotionally attached to a stock. You have learned how to use insider buying and institutional ownership to further refine your stock selection process.

But if all you do is find the right stocks to buy at the right time, you can still fail (and fail miserably) at building a world-class portfolio of stocks. Rules 8 and 9 will teach you how to balance your investments based on the amount of money you have to invest in the stock market and, at the same time, avoid putting too many of your eggs in one basket.

Rule 8 is all about diversification. In this rule, you will learn how proper diversification can save your investment life when all else fails.

Do Not Put All Your Eggs in One Basket

You have heard all your life that you shouldn't put all your eggs in one basket. In other words, you should not put your entire life's financial security into a single investment or single type of investment. The reason is obvious, of course. The risk is just too high that something unforeseen could happen and either financially cripple you or, worse, wipe you out completely.

I doubt there are very many investors who do ...