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Stock Tip Lesson: Diversify

Stock Market News

November 1999

Stock Tip Lesson: Diversify

The past twenty years have taught stock market investors a lot about what works and what does not. Recent years have brought lessons of high technology stocks while the entire history of the stock market has lessons of importance about utility stocks. Large companies or small, history can show us patterns in the market that we should pay attention to. The most prominent lesson seems to be an obvious one: DIVERSIFY. Here are a few of the key investment lessons we can learn from Wall Street history.


Tech Stocks

Recent years have brought out the big-money seekers and many lucky overnight millionaires. Many investors have failed to reap any rewards and many have lost their shirts. The lesson for tech stocks seems to be the same as for the stock market in general: DIVERSIFY. The best advice from those who have been there is to spread your money out over several segments of the Internet and tech market. You may want to invest in a few content providers, service providers, software, security or even utility companies.


Utility Companies

Traditionally, utility stocks have been bought for income and security. They seemed to have grown slowly and cumbersomely at an unglamorous rate and with little appeal to the profit-takers in the market. Growth is eminent in these utility companies now and there are several reasons to take another look at utility stocks.

· Deregulation has given the utility companies freedom to grow.
· Rapid technological advancement has given rise to greater efficiencies and greater productivity.
· The mergers and acquisitions trend has made the utility companies targets of takeover plays.
· Utility companies are still seeking alternative fuel resources, realizing that the need is still real and will create great fortunes in the future.

Utility companies are exploring new and traditional strengths to find ways for their companies and shareholders to profit. The utility companies themselves are searching for new ways to diversify. Historically, utility stocks have provided the security of a blue chip stock. Today's utility stocks may also provide some of the bearish appeal of some of the high tech neighbors.


Large Company versus Small

History, especially in the last twenty years, has shown that small company's do best coming out of bear markets and recessions. Stocks of large, rapidly growing companies do well in times of economic uncertainty such as fear of a recession. No group of stocks leads the way all the time. History says to diversify between small company stocks and large company stocks. More recently, the large growth stocks such as Microsoft and Home Depot have outperformed almost every other segment of the market. This performance is unprecedented and usually these stocks are outperformed by their small stock competition. The new lean and mean philosophy adopted by most companies in the 1980's and the early 1990's may help to keep the large growth stocks performing well in the future.

It appears that the demand for stocks is going to rise. The past shows us the old cliché' that you should not put all of your fragile eggs in one basket is true. Advisers reiterate that you should not write a check for stocks unless you can stand to lose the money. Beyond that, the central theme learned from history seems to be to diversify.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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