Diversification Plan

An investor must be diversified at all times to avoid financial ruin. This allocation should involve cash, stocks, and bonds among different sectors and companies. Of course, you will have slow growers in the group that limit your overall gain, but putting too much money on one stock because you are certain that it will gain a lot is a recipe for disaster. You have probably heard the cliche "the devil is in the details", and the odds are great that something unknown in the stock market will strike down your favorite stock pick when you are counting on it the most.

For example, suppose you thought the stock market bottom came in August of 2011, and you put half of your money on ERX, the triple long energy ETF. If this was $10,000, and you bought ERX at $40, you would have lost more than 25% or $2,500 before ERX finally hit the bottom October 4 briefly at $26 per share. Then, what if you had a panic attack and sold ERX when it got around $30, and you loaded up half of your money on TVIX because you thought we were going into a bear market? You not only sold while you were down, but TVIX dropped 25% from its high during the first week in October. So, you would have lost thousands of dollars more back to back.

Do not put half or all of your money on anything no matter how desperate or certain you are about a stock or the market direction. You will often be wrong due to unknown stock market variables. This can also be at the worst possible time if you need the money. For example, the Fed might suddenly do some quantitative easing to avoid a recession at the very time you have gone half in betting on a bear market. So, the government could cause a big boost in stocks at any time. Then, the bulls will suddenly take your money before you can get out of a bad trade.

Here are ten stocks you could buy for diversification, and you should sell them whenever you have a good profit on them. Then, keep that money in cash for whenever you can buy them again at the annual low point.

1. ERX, the triple long energy ETF stock.

2. TVIX, the double volatility stock for bad times.

3. AGNC, a REIT that was paying a 19% dividend in 2010 and 2011.

4. TNK, an oil tanker company that was paying a double-digit dividend in 2011.

5. JNK, a bond ETF that pays around 8% annually.

6. RCS, another bond ETF that pays 8% or better depending on when you are in it.

7. MCP, a strong company involved in rare earth minerals.

8. AGQ, a double long silver stock.

9. GLD, the gold trust ETF.

10. DIA, the Dow stocks ETF because they are the strongest group.