Diversification

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Diversification means buying stock in a range of different industries. "The idea is that, because you cannot possibly know which stocks will perform better or worse than average, you cannot afford to put all your money into one company, or even in companies within a single industry. You have to spread the risk--and the opportunity. Only by diversifying will you be able to realize your average return objective with lower risk." (Starting and Running a Profitable Investment Club, Thomas E. O'Hara and Kenneth S. Janke, Random House1998)

Some sample stock areas are:

manufacturing
finance
food services
technology
pharmaceuticals
home building
oil
retail
chemicals
utilities
banking/thrift
conglomerates (GE, Colgate, GM)
water
cosmetics

Diversification by company size is also important.

Size Dollar Value Growth Potential

Major Co. $3-4 billion 5% to 7%

Medium $400mil to 3 bil 7% to 12%

Small $400mil or less 12% and greater

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