This is a risky proposition as it opens up the door to disaster. That's because any stock can have an earnings miss, or accounting scandal where the stock drops 20%, 30%, even 50% in the blink of an eye.
If it happens to be one of the few stocks you hold, then your whole portfolio is going to be in a deep hole. It isn't a question of just picking stocks that always go up...no one does that. It is about protecting your total portfolio through proper diversification.
There is more than one way to view diversification. So we will tackle each of those concepts below along with the solutions that will get your portfolio on the right track.
Right Size vs. Academic Studies
The academics all agree that the best number of stocks to hold in a portfolio is somewhere between 15-20 names. That is easy to accomplish if you manage a large 6 to 7 figure portfolio. But 20 stocks is not a realistic target for most investors who prefer to buy and hold round lots of at least 100 shares.
The solution is to hold a portfolio with many low priced stocks. Like $10 per share or less. This way the average investor can diversify their total investment away from a precious few stocks to a wide array of names that hold nearly the same promise, if not more.
More . . .
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Low-Priced Stocks with Sky-High Potential
Zacks is now revealing some of its most exciting stocks. Priced under $10 per share, these high-quality companies could see long-term gains of 2X, 3X and even more.
Strong earnings growth plus other Zacks' indicators tell us which stocks are ready for lift off and capable of climbing for months to come. Get in before they take off, then ride the profits high and long.
Bonus Report: Get 5 Stocks to Double FREE until Sunday, July 10.
See Zacks' Best Stocks Under $10 Now >>
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Yes, low priced stocks individually carry more risk than larger blue chip names. Gladly a diversified portfolio helps to remove much of that risk while providing greater reward because most are higher growth investments.
Rotations Hit Faster Than You Can
Remember the market often goes through painful market rotation periods where the hot sector gets ice cold. And now those previously out-of-favor groups are running higher. These rotations are not pre-announced. They can truly take place at the drop of a hat. So the best way to prepare for that ahead of time is by this form of industry/sector diversification.
One concept that is key to proper diversification is to hold stocks from several different sectors. This is a basic tenant of investing: don't put all your eggs in one basket.
Too many investors are drawn to tech names. So it is not about having software vs. hardware vs. internet stocks vs. biotech. Rather it is about thinking in broader sector terms like technology, retail, auto, energy, industrials, healthcare, transportation, etc.
It's fine to have extra exposure to the hottest groups. However, try not to have more than 30% in any one industry.
Size Matters
Small caps are known for being more risky and less liquid than the big and mid cap stocks. This means that they hold more potential for gains as well. When you only have limited funds and the desire to invest in a diversified portfolio, don't forget to spread the wealth.
Big caps that are low priced will often give your portfolio some much needed stability. These are stocks that have likely seen something go wrong to get into single digits, but adding a few with turnaround potential is crucial to survive the ebbs and flows of the market.
Low priced stocks tend to be small caps, but there needs to be a few mid cap and even some mega cap stocks in your portfolio. This will serve to give you some market capitalization diversification in your portfolio.
Patience Pays
When an investor doesn't have all day to watch the portfolio - much less build one - it is key to add a healthy dose of patience. This will give your stocks the best chance to grow into solid long term winners.
The desire for the quick buck is always there. You just have to know that when your money is working for you, it is always on the clock. That can work out for the better or the worse, and it will drive you crazy if you look at it incessantly.
Over the long term, low priced stocks can turn into high priced stocks. But the key idea there is 'long term'. Select good stocks that have strong near term potential to get off to a good start and then hold them for the long term.
Where to Find the Best?
Finding those low-priced stocks most likely to become high priced stocks can often feel like searching for a needle in the haystack. It's both frustrating and too time-consuming for many investors.
However, I have a knack and a passion for this work. That is why I head up the Zacks portfolio Stocks Under $10.
I have a powerful advantage for finding and staying aboard the best of these companies: the Zacks Rank system. Overall, Zacks Rank #1 stocks have nearly tripled the market with average gains of +26% per year since 1988. And when you look at strong Zacks stocks that are small caps (toward which our portfolio skews), the gains have been even greater than that.
Stocks Under $10 focuses on 10-15 well diversified companies that have the best long-term potential. We get in when the fundamentals point to success ahead, and will ride them long and high. Certainly we will enjoy our fair share of doubles and triples as time rolls on.
So if you are interested in low-priced stocks, with improving fundamentals and great upsides, I invite you to check out Stocks Under $10.
In fact, now is an ideal time to get started. On Monday morning, I am adding a fresh stock in the biotech space that is already building momentum and has outstanding gain potential.
You can get aboard at the beginning of what looks to be a very profitable ride.
Plus, our new special report 5 Stocks to Double is available as a free bonus for investors who look into this exclusive portfolio by midnight Sunday, July 10.
Get details on our Stocks Under $10 portfolio right now >>
Best,
Brian
Brian Bolan is our aggressive growth expert and one of the hottest hands at Zacks who specializes in long-term double-digit stock gains. He is the editor of the Zacks Stocks Under $10 portfolio.