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Author: Scott Campanella Article source: http://www.kabish.com/. Used with author's permission.
The best way to avoid being hit hard by a stock market crash or another Enron/Worldcom fiasco is to make sure you don't put all your eggs in one basket. Diversification helps ensure steady growth of your net worth as you accumulate more assets.
This idea is not limited to the stocks in your portfolio, but should include all of the components that make up your net worth. For instance, it's OK to take $5,000 and put it in a stock you like as long as you have plenty of assets in other areas, such as home or property value, mutual funds, savings, etc...
However, if you're still in the beginning stages of building wealth, and you only have $500 in savings, and you're renting an apartment and lease your auto, you probably don't want to put $5,000 in one stock. A good guideline is to keep from having more than 20% of your net worth in any one asset, unless it's your home.
Here's a good example of a diversified net worth portfolio for someone in their 30's:
Checking account : $2,000
Emergency savings: $5,000
Regular savings: $3,000
CDs or T-Bills: $5,000
Growth stocks: $5,000
Net value of vehicles: $7,500
401(k) plan: $15,000
Equity in home: $20,000
Other Tangible Net Assets: $10,000
Of course, the amounts will be more or less, depending on your age & situation in life.
Also, don't forget to protect your net worth with some long-term disability and/or life insurance, even if you're young. Following this simple guideline will hopefully help you reach your retirement goals. About the author: Scott is in his mid-thirties and has a Bachelor's Degree in Accounting, with a minor in Decision Science. He entered the accounting field ten years ago, when he started working for a software company, where he stayed seven years. He is now the Inventory Control Manager for a large winery.
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