Diversification : How I'm Learning the Hard Way!

I've already posted about How I Invest through Jim Cramer's service. I've also read through Jim Cramer's 25 rules of investing. But one rule I apparently didn't pay enough attention to is :

Diversification

Boy, did I learn this one the hard way recently. As I mentioned in my investing post, Cramer will own 25 stocks in his portfolio and I can only afford to hold 5 to 7 names at a time. In the past 5 or 6 months, I jumped on two of Cramer's recommendations: Network Appliance (NTAP) and Citrix Systems (CTXS). It seemed innocent enough. Just for clarification, Network Appliance is classified as being in the computer hardware industry. Citrix Systems is classified as being in the computer software industry. Reading closer, you will also see that Network Appliance is also involved in software. Because Cramer has 25 stocks, holding two in the same or similar industry qualifies as being diversified. But for me, holding only 5 to 7 stocks, doesn't qualify me to do this.

So how did I learn this rule the hard way? Both of these names have had a rough road lately. I guess Cramer is right when he says that 50% of a stock's performance is the industry they are in. I ended up down $800 on Network Appliance before I got out to focus on defending my position in Citrix. I'm still down about $500 on Citrix but I have a plan to turn this one into a money maker. Fortunately, Citrix has made a big comeback in the last week.

I learned. If I'm only going to hold 5 or 7 stocks, they have to be in completely different industries. No argument from me anymore on this one. I'm going to be a lot more careful in the future. So when Cramer recently recommended Haliburton, I passed on it, as I already owned Nabors Industries, which he had also recommended. Both Haliburton and Nabors operate in the oil services industry.

Please take the time to read Cramer's rule. I'll link to it again here. Sometimes companies appear to do different things, but deep down, can be considered to be in the same industry.

Happy investing everyone!