I talk abt stocks, unit trust, ETF(exchange traded fund) the previous post.
let talk about how to eliminate the value, countries and sector specific risk.
Answer: Diverse and dollar cost averaging.
Diverse
Invest in different sector and countries, which will make the non systematic risk tend to 0. It will cushion the drop of the portfolio in a crisis as the portfolio involve many different good stocks. However it also will slow down the growth of the portfolio too.( there is no perfect, if u wan a quad core processor it is sure more expensive than a pentium 3 processor) everything have its price.
Dollar cost averaging
Invest in a regular basis. It more applicable for unit trust or ILP(if u consider the investment element). As an equal dollar is invested regularly, when the units price is high, one buy less unit, if the unit price is low one buy more unit.thus could average out the unit price to be lower.
Now on:
Stocks
identify the business and invest into different sectors. So eg if a H1N1 is here, the airline industry is hit but the pharmaceutic industry is going up. invest the value of the stocks, dont find the cheapest stock, usually expensive stocks do have a reason and the reason is of it value.Identify the market leader. There is a research done on how many stocks will be sufficient to diverse the portfolio which mean non systematic risk tend to 0, as non systematic risk has a exponential negative. 70 stocks atleast to bring the non systematic risk to 0. and 70 different correlation stock.
Which mean u need quite alot of money to diverse the portfolio urself. nonetheless i hope individual still invest in stocks themselve. Pls do not hearsay and buy stocks. Do research. if newspaper and analysis on TV are so accurate, why analyt still working as analyt, why dont they jus quit their job and invest all thier asset in the stock.
So check on what the company do, the past financial performance (at least 3 yrs), the competitors, the ease of new comer to enter the business, the management of the company, the market capitalisation etc...Pls do not be lazy when investing stock yourself.
next post will talk abt ETF and unit trust
