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The Most Important Rule of Investing

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  • (0:45) - Are you Diverse Enough With Your Investments?
  • (2:00) - Breaking Down Buffett’s 13F Filing
  • (7:45) - Are ETFs A Good Deployable Strategy?
  • (15:30) - Big Takeaways On Diversification: UAL AAL, LUV, DAL, JPM, BAC, WFC, C

Welcome to Episode #164 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

In this episode, Tracey is going solo to talk about the most important rules of investing: diversification.

Diversification in a stock portfolio can mean diversity in industries, sectors and market cap. This podcast focused on industries and sectors.

As of the Nov 9, 2018 13-F, Warren Buffett’s Berkshire Hathaway owned shares in 4 different airlines including Southwest (LUV - Free Report) and United Continental (UAL - Free Report) .


They’re all in the same industry and fly to similar cities. They are all trading with similar valuations. Do you need to own 4 in your portfolio?

Investor Mistakes

Often, investors think that owning “more” stocks means they are more diversified. When, in reality, they often own a lot of stocks in the same industry or sector. This doesn’t lower the risk, it enhances it.

The airline stocks often move together. If fuel costs are rising, they usually rise at all of them. Similarly, if there’s a recession, they are all likely to be impacted in similar ways.

Investors should make sure that they are sufficiently diverse in their holdings. ETFs are another good way to add diversity if you can’t achieve it through individual stocks.

How Many Banks Should You Own?

Berkshire Hathaway is also a big holder of bank stocks. It now owns 7 of the 10 largest US banks such as JP Morgan (JPM - Free Report) and Bank of America (BAC - Free Report) .

But you can achieve that by buying a single ETF.

The Financial SPDR ETF (XLF - Free Report) has over 60 holdings but four big banks make up 28% of the ETF. Those are JP Morgan, Bank of America, Citigroup and Wells Fargo. Berkshire Hathaway, itself, is also 14% of the ETF.

The top 5 holdings, therefore, are over 40% of the ETF.

What else should you know about diversification in a stock portfolio?

Tune into this week’s podcast to find out.

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