Avoiding Rash Decisions

The fun part of investing is constructing a portfolio -- assembling a group of stocks that you will have and hold practically forever.

The key is diversification. You don't need a lot of variety, but you're taking a big gamble if you concentrate on a few stocks or a few sectors. The problem is not so much that you will make the wrong choices, but that the volatility -- the ups and downs -- of a highly concentrated portfolio can be extreme, and you'll be tempted to make changes at the wrong times.

A good illustration is Merrill Lynch Growth Fund. The manager moved heavily into energy stocks in 1997, and the result was disaster. When Merrill put a new manager in charge, he jettisoned nearly all the energy stocks in late January, just as these shares were hitting bottom. A short time later, oil prices began to rise and energy stocks soared.

Silverman did what any sensible person would do -- tried to correct an imbalance in his portfolio -- and the move backfired.

Read my column to learn about the importance of diversification.