As I said before, my answer to any financial question is it depends!

Continuing where I left off in my last posting, once you know what you are going to do with the earnings and/or gains from the investment, what your time frame is, and what your risk tolerance is, the savvy investor will want to make sure all their investments are diversified. The old adage is very true; you don’t want to put all your eggs in one basket. If your company offers a 401(k) and they make the company stock available in this 401(k) you want no more than 10% (both inside of your 401(k) and out) of your total investments in your company’s stock. The reason being you work their (8 hours a day, 5 days a week, 1/3 of your life), if available your pension is with them, and if you put your investments with them and something happens to the company your entire financial life goes right down the drain. You don’t want to end up like those employees from Enron.

Most 401(k)s have mutual funds available for your investments. This gives you the ability to start your diversification with these investments. By design, mutual funds can invest in multiple different companies because they are combining many people’s investment dollars and they are able to hire the professional staff to analyze and watch over many different investments and companies or municipalities.

You will be able to choose various types of equity and fixed income investments and some offer a limited number of real estate investment trusts mutual funds. This gives you the ability to use the Nobel Prize in Economic Sciences, Harry Markowitz’s Efficient Frontier Theory of getting better risk-adjusted returns by mixing different investment types (Equities, Fixed Income and Cash) through Asset Allocation. Typically, I recommend that in your retirement accounts you invest in equity and/or fixed income investments. This leaves the cash investments for your emergency fund. I recommend this fund be at least 6 to 12 months of your living expenses (including debt service).

Once you have the basics covered you can then begin investing. Most any knowledgeable investor will recommend you diversify your investments among the seven major business sectors. These sectors include: consumer discretionary; consumer staples; energy; financial; health care; industrial; information technology; materials; telecommunication; and utilities. By doing this when one sectors struggles other investments could be still holding their own or possibly doing well.

Personally, because I own General Electric and they are diversified through many sectors, I am diversified through many sectors. I am heavy in energy and void of anything in information technology. The void in information technology is not because there are no good investments, rather that I am less knowledgeable in this area. I am heavy (3 companies) in energy because I feel that the market for energy is strong and these three companies are well valued. I continue to look for good investments, but for right now am very comfortable with the continuing investments I am making in the stocks I already own.