Key Principles From the New "Motley Fool Investing Guide": Diversify

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On this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined for a very special podcast crossover event by Motley Fool co-founder (and host of Rule Breaker Investing) David Gardner. The hook? The Brothers Gardner will this week release the third edition of their now-classic tome, The Motley Fool Investment Guide, updated and revised for the world we're investing in today. Some points haven't changed much at all since they first published it 19 years ago, and one of those is that smart investors diversify.

A full transcript follows the video.

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*Stock Advisor returns as of September 5, 2017The author(s) may have a position in any stocks mentioned.

This video was recorded on Sept. 5, 2017.

Alison Southwick: Our fifth and final lesson is about diversifying.

David Gardner: Yeah, and I would say just as we're diversifying our four points with this fifth point, you should be doing the same thing with your investments, and I'm pretty sure I don't need to say much at all about this one, because I think Motley Fool Answers listeners are aware of this, and you all help people think about that from month to month as the years while by and we do our podcasts.

So, you know, for me, I think everybody should have 15 stocks at a minimum if you're going to choose stocks, which I highly endorse. I think it's a wonderful thing to do. Even if you don't want to choose stocks, if you just want to invest in index funds, I still think you should buy one stock, even if it's a tiny percentage of what you have, just to participate in being an owner and see how the markets work. And darn it, you might even do well with that company, especially if it's one that you feel good about for the next 10 years.

So, I think, but for investors who are stock market investors, 15 stocks at a minimum. When somebody joins Motley Fool Stock Advisor or Rule Breakers, if they have no stocks, I say get from zero to 15 as quick as you can. Maybe not as fast as a Tesla Model S can get you, but as fast as you can get from zero to 15 stocks, please do. Please don't bank it all on one big stock that you think is going to work out. Be diversified.

Robert Brokamp: Do you have a level of comfortability with how much you have in a single company?

Gardner: My level of comfort there is well beyond, I would say, the average human's, and so I don't know that I'm a good source of information on this one, Robert, because I'm willing to let a stock become even more than half of everything that I have, and that would only ever happen if that company was one of 100 or more times in value.

I tend not to sell stocks. I tend not to rebalance. I tend to allow stocks to run, which means the good news is when the winners win, they really, really win. There are two forms of bad news. One is that you're going to end up with way too much of that stock, which is kind of bad news because it can be stressful for a lot of people. It's not as much for me.

And I guess the other bad news there is if you start becoming unwilling to sell it or shave it down because you don't want to pay those big capital gains taxes -- because you have a big capital gain when you have a stock like that.

But again, back to the good news. When you hold your companies and let them prove out their allocations for your portfolio over time, if you invest in bad stocks, which I do -- I recommend them all the time. I have a lot of stocks that have lost more than 50% of their value that I've recommended in Rule Breakers and Stock Advisor. I'm ashamed to say it, but it's true. The good news is if you didn't add to them, which I don't, then they start to become almost irrelevant in your portfolio.

So the stock that a lot of people live in fear of, something that would lose everything -- imagine if you bought a stock, I still never have done this, that went down 100%. The good news is, it's gone. It's starting to occupy almost none of the allocation of your portfolio.

So I like to let my stocks win and run over time, but a lot of people wouldn't be comfortable to the extent that I'm comfortable with that.

Alison Southwick has no position in any of the stocks mentioned. David Gardner owns shares of Tesla. Robert Brokamp, CFP owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.