Diversification May Be Hazardous to Your Financial Health

For the longest time financial pundits have espoused the benefits of diversification. They even have financial calculators that tell you what your mix of stocks, bonds and cash should be depending on your age. Recently though I came across and interesting statistic from Morningstar:

• 17% of all stocks tripled in value during the last five years, but just 1% of all mutual funds matched that performance.

Now I am not suggesting you take a dart and blindly throw it at the business section's stock listings, but I am urging you to take the time to re-balance (or completely overhaul) your stock portfolio. Here are some tips to maximize your stock returns:

• Find the best public companies that you are personally interested in or understand.
• Make sure they have a top notch management team that has a significant stake in the company and are buying (not selling) the company's stock.
• The company should be growing and be in a growth industry with lots of market potential.

These tips may seem vastly generalized, but they are for a reason and not every public company will fit these criteria. The purpose of the list above is to provide you with a guideline for screening a dozen or so stocks for the best of the best. This isn't a new strategy by any means. As a matter of fact the world's second richest man, Warren Buffett, avoids diversification by owning a few companies that he knows and understands.

Here is a list of companies that I am currently looking at:

• Johnson & Johnson (JNJ), Target (TGT), 3M (MMM), Garmin (GRMN), FedEx (FDX), Citigroup (C), Centex (CTX), MetLife (MET)

Why buy a bunch of average stocks when the only outcome is going to be average returns? I still believe in having your money in different investment classes (a mixture of stocks, bonds, cash, real estate, gold, etc.). It just doesn't make sense to own 20 individual stocks that you know nothing about and cannot keep up with on a regular basis. Happy Investing!