Diversify: Stay away from individual stocks

Yes, the market overall is not doing great now, but it could be a lot worse if you had a lot of your money invested in some individual stocks like Countrywide or Bear Stearns. Try losing 90% or more on these stocks, instead of 9% on the market. That is why the general rule of thumb is to never have more than 4% of your money invested in a single company. Most investors understand the value of diversity, but still don't follow this rule for a number of reasons:

• they see stocks like Google, Microsoft, or Apple beating the market regularly and think these stocks are sure bets
• they think they know a lot about specific companies or industries and feel comfortable taking a gamble
• they see certain retail products everywhere and think the company must be doing well
• they work for the company and get discounts on stock purchases, pressured into buying, or free shares as bonuses

Despite any of these reasons, you should try to maintain diversity in your portfolio. This is even more critical if you own a lot of your company's stock, as your employment, retirement, and savings may all be tied to a single company. The moment things turn bad at the company, you could lose all three. For that reason, I would suggest holding even less than 4% of your company's stock. Sometimes it cannot be avoided, such as when you are awarded stock options or shares as compensation. However, if that is the case you should try to maintain diversity by doing the following:

• immediately exercise options when vested and sell the proceeds to maintain the 4% ratio
• do not invest your 401(k) in company stock based mutual funds
• resist enrolling in employee stock purchase plans (even if there is a discount) unless you can immediately liquidate. Avoid costly transaction fees by selling the shares only once or twice a year, reinvesting in diversified funds
• Balance your portfolio by purchasing enough other funds or stocks to keep that 4% ratio
• Elect to receive cash bonuses vs. stock or options, whenever possible

This applies equally, whether you are at a public or private company. I have had this situation come up many times at my job, which is privately owned, but does have shareholders. The problem with private companies is that there is no liquid market to sell shares and often there are strict rules as to when and how you can sell them back. I have been awarded bonuses in the form of shares for many years and have no choice in the matter. So I have avoided investing my own money in shares whenever possible. I haven't participated in stock offerings and I have elected to receive cash the one time the choice was offered. I know there can be a lot of pressure to buy company shares to show your committment, but I value my personal financial freedom and philosophy higher than making a good impression and I have had to explain that on more than one occasion.

The stock market has shown to go up over the long term, but individual stocks have not. Stock prices depend on companies constantly growing. It is not enough for a company to continue to make a steady profit every year, it has to continue to increase that profit. So rather than guess which company will continue to grow, keep a broad, diverse portfolio.

Bear Stearns bail out becomes buy out

It was only Friday that JP Morgan was helping to bail out Bear Stearns with the US Government's backing. Now it apparently has decided that it would be better to acquire the company for far less, just $236 million. Its only assets at this point are probably its office buildings and furniture, as its debts far outway any value of the company. The purchase price equivalent to $2 a share represents a discount of 93% from Friday's close, which itself was already down 47% from Thursday.

Bear Stearns got into liquidity problems when two hedge funds failed last summer and their bread and butter mortgage backed securities suffered huge losses. Banks can take a quick tumble when investors and the financial communites lose faith and begin to pull their money out or stop offering lines of credit, as the only real assets a bank holds are the loans it gives out and the only source of liquidity are investments people make in it. When those both turn sour, things can go bad real quick. Bear Stearns' share price dropped greater than 97% since last Monday's open.

Bear Stearns was less diversified than some of the other financial institutions, but there is no doubt the whole financial sector will feel the pain on Monday. Expect huge losses that drag down the whole market on Monday. This all but guarantees a rate cut of the Fed funds rate of 100 points this Tuesday, with rumors it could go as high as 200 points. It already cut the discount rate 25 points this weekend.

Bear Stearns is feeling the same pain as the investor who was too leveraged in real estate and didn't diversify their portfolio. Only the private citizen won't even be offered the $0.67 on the dollar Bear is getting.

Bob Brinker MoneyTalk Commentary 3/9-1/10

Bob called for a guaranteed 75 basis point rate cut on March 18, with a slight probability of higher. I wonder how that changes with the latest Fed actions. It looks like we still may get a 50 point cut, but we'll see.

Bob also gave 50% chance of being in a full blown recession, but thinks if it happens, it will only be for the first two quarters of 2008. His guest, Dan Ariely, author of Predictably Irrational, was quite interesting and talked about the psychology of things such as stealing, lying , cheating, and investing.

On Sunday, Bob's guest, Teresa Ghilardu, was an odd choice as she seemed to preach pension and annuity ideas contrary to his often repeated opinion. She was pro pension and annuity (when provided buy the company). In particular, she generalized to always take the annuity rather than the lump sum, when offered. I was waiting to see how long it would take for Bob to jump all over her. He actually tried to give her an out, by saying it was a case by case basis, but she wouldn't bite. She didn't really like giving the investment choices to the person, but wants them to trust in the pension.