Portfolio management is another very important task for an investor. In this chapter, we will split the portfolio management into three parts:
1. Portfolio creation: Diversification, number stocks in the portfolio, and position sizing.
2. Managing the portfolio: How to add new positions and trim existing positions.
3. Consider different countries.
You probably already know that you should not invest all of your money in a single industry or related industry. If your portfolio is diversified and any one particular industry is down, you should not experience a loss.
For example, when the 2008 financial crisis struck, the real estate industry was hit the hardest. Real estate started booming in 2004 and banks started lending recklessly to sub prime borrowers. If you invested all of your money in home-building companies and/or banks that lent the money to sub prime borrowers, you might have lost 50 to 70 percent of your portfolio assets when the financial crisis hit. With diversification, your main task is to not invest most of your money in a single industry or related industries.
You should diversify your portfolio with at least 7 to 10 companies in different industries that are not related to one another so that one industry downturn does not affect your portfolio in a negative way. This does not mean investors should try to spread out their investment dollars between 50 or 100 companies, ranging across 20 different industries. That ...