Understanding Stocks: Lesson 1

Many investors assume that by diversifying their portfolio across multiple sectors they are risk free. The "stock will eventually go up" attitude used to work, but with today's market volatility and sector weaknesses, no stock is worth betting the farm. One key metric to follow and observe when investing is the beta.  The beta is simply a ratio of a stock's performance against the rest of the market. The higher the beta number is, the more likely that stock will move at a quicker pace than the overall market. In order to fully balance a portfolio, it is not only important to spread your investments across sectors, but also among different beta values. The closer you maintain a beta average of 1, the less you expose yourself to market volatility. Note: it is best to "average down" your market volatility as you get closer to retirement. It is best to have a higher beta average when you can most afford the risk.