Portfolio Risk
You can reduce your overall risk by diversifying your investments over a variety of stocks in diverse industries.
The airline and oil industries provide a classic example. Increasing oil prices translate to high profits for the oil industry, but the resulting increases in fuel costs depress airline profits, and hence their stock prices. Conversely, airlines tend to prosper when fuel prices drop, and the oil industry is suffering.
Opinions vary on the number of different holdings required for adequate diversification. Some say that you can achieve adequate diversification with as few as 12 stocks, while others say as many as 40 or 50 different holdings are required. Diversify as much as possible, and above all, avoid investing more ...
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