The unimaginable has happened. General Motors (NYSE:GM) and Citigroup (NYSE:C) are slated to be removed from the Dow Jones Industrial Average (DJIA) and will be replaced by Travelers Companies (NYSE:TRV) and Cisco Systems (Nasdaq:CSCO). While foretelling the removal of these two global brands from the DJIA 10 years ago may have been improbable, the benefit of diversification moves front and center.
IN PICTURES: Learn To Invest In 10 Steps

How Does Chapter 11 Affect My Stock Holdings?
The liquidation of a company and the zeroing out of a stock typically happens when a company files Chapter 7 bankruptcy. Unlike its bankruptcy filing sibling, Chapter 11 bankruptcy - announced by General Motors on June 1 - allows a company to carry on with its operations while it transforms into a leaner version of its previous self. The Securities and Exchange Commission makes it clear that in most Chapter 11 cases the company's plan of reorganization will cancel the existing equity shares. This is the reason investors should remember their place in line behind secured (banks) and unsecured (bondholders) creditors who stand to be repaid first before common stock holders.

How Many Stocks Constitute A Diversified Portfolio?
The right answer is up for debate, but I'm comfortable with the number of individual holdings for a diversified portfolio falling somewhere between 12 and 16 stocks.

A baseline for building a diversified portfolio for the avid stock picker could be the sector allocation utilized by the SPDR S&P 500 Fund (NYSE:SPY).

Sector % of
Total

S&P 500 Proxies

1

TECHNOLOGY 17.06% Cisco Systems (Nasdaq:CSCO)

2

HEALTHCARE 15.17% Amgen
(Nasdaq:AMGN)

3

OIL & GAS 12.98% Exxon Mobil
(NYSE:XOM)

4

CONSUMER SERVICES 11.93% Wal-Mart
(NYSE:WMT)

5

CONSUMER GOODS 11.43% Kraft
(NYSE:KFT)

6

FINANCIALS 11.36% Wells Fargo
(NYSE:WFC)

7

INDUSTRIALS 11.16% 3M
(NYSE:MMM)

8

UTILITIES 4.55% Duke Energy
(NYSE:DUK)

9

TELECOM 3.92% Verizon
(NYSE:VZ)

10

BASIC MATERIALS 2.58% Alcoa
(NYSE:AA)

The percentage of total investment can be changed based on your personal preference, but a stock from each sector would be a great place to begin. To go beyond the 10 stocks derived from the S&P allocation, investors can take note of asset classes used by the Harvard endowment and include a foreign stock, an emerging market stock and an investment in a stock tied to real assets like a REIT or agriculture.

Alternative Methods To Gain Diversification
There is always the option for investors to choose from a host of mutual funds and ETFs to gain even greater diversification in order to avoid being subject to the fate of any one company. Looking ahead, investors should still ask themselves if the companies they choose will be around 10 years from now, but proceed with a plan to keep their portfolios alive with an eye focused on diversification.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!