Before you ask "Am I diversified", you should make sure that you know what (proper)
diversification is. It has nothing to do with buying in several industries, buying in
several sectors, or buying several kinds of securities. It only has to do with risk:
buying securities whose returns do not move up and down together.

Last week I did an analysis on Berkshire Hathaway's portfolio; it is extremely
well-diversified, despite Warren Buffett's claim that diversification is only for people
who don't know what they're doing. Adding NVS to BRK-A improves the diversification: over
the last five years they have a correlation of monthly returns of only 11% which is quite
good.

I'm not in the five stocks is adequate diversification camp. If you only have room for
five positions, I would make them all closed end funds or mutual funds. To have adequate
diversification, you need 15-20 stocks. It's not uncommon during bear markets for
individual stocks to go down 50%, and for multiple stocks to go down with seemingly little
rationale behind the correlations. Can you stand a 10-20% impairment of your capital
allocated to stocks? If not, then holding five stocks is too few.

I appreciate all your responses and the time you gave me. I will look into all the
companies mentioned.
I am intrigued by the suggestion of Henry the Trader regarding the New York Stock Exchange
as an investment. A line from the movie Trading Places springs to memory. " You see Mr.
Valentine, regardless of whether or not our customers make money or lose money, the Duke
Brothers always make money on every transaction." And then Mr. Valentine answers: "Oh
yeah, so you Duke Brothers are like bookies?"

This really depends on some other variables such as the time until you retire, how much
time you want to spend doing research and managing things. and if this is your only source
of retirement income, i.e., your nestegg. Berkshire is much more than an insurance
company. It's over 30 private companies held under the BRK name itself plus Buffett's
HUGE investment potfolio, which is pretty much a mutual fund. These holding can be viewed
on this very site and we are talking 10-20% of the entire shares. You are really getting
the best of both worlds and you have world's best investor handling your money. You should
check out the BRK website and read the Letters to Shareholders on the site. Honestly, I
would say dump the Novartis and stay long BRK.

i would add some DOW for dividends and decreasing costs in materials, EXP for a small
mid-cap industrial company .. and finally! some COF, a good financial.. to cover any
downside in DOW from increasing materials cost (although I don't see a lot of upside in
nat gas), buy EOG.

consider the fact that we've got nothing but huge builds in inventory.. and a ton of
exploration going on as a result of the high prices. expect natural gas to go lower.

Last edited on: 01-14-2007 02:42 am

I agree with Henry about tech. Some stocks to look at might be CSCO, AAPL and GOOG. Also
something in the consumer staples. I, along with a lot of people on this site, really like
MO.

Check out closed-end funds. Closed-end funds are like mutual funds except that they trade
on an exchange, usually the NYSE. They also often trade at a discount to what their "net
asset value" is. For instance, cut and paste this URL for a look at closed-end funds with
a big discount:

http://stockpickr.com/port/Top-10-Discounted-CEFs/

Another thing I would do is check out the blog post here on creative ETFs.

Ellen,
I think you should consider Oil, Housing and Technology. Maybe throw in one of the
Exchanges as well, like NYX, ICE, ISE or NMX.
That's just my opinion.

HenryTheTrader

I am a newcomer here. I am a nonprofessional and I am managing my own IRA and an
inherited IRA. So far I have purchased only two stocks; Berkshire Hathaway A and B
shares BRKA and Novartis, NVS.
Berkshire Hathaway is diversified itself but it is essentially Insurance. Novartis is Big
Pharma with some biotech and retail mixed in.
My question is, with my now having two Large Caps should I look at small caps next? Or
should I think about sectors? Which three additional type of stocks should I add to my
portfolio to get good diversification? I would prefer to have only five or so stocks.
I have the bonds and cash part figured out. I just need a little advice on
diversification principles. Thanks.