Some risks are unavoidable.
Some can be eliminated through prudence and discipline. One type of risk,
called unique risk, representing the potential volatility that one company's
fortunes may bring to a portfolio, can be reduced simply by diversifying -
by holding many different securities.
The chart
also displays how having a totally separate asset category, in this case
international stocks, reduces overall volatility even more.
We initiate risk reduction through sector
diversification by which we will not invest more that 10% of assets in any
one industry. Moreover, we will not invest more than
5% of assets in any one stock. In fact, most positions represent 3% or less
of a given portfolio. Exceptions that might show up on a statement include
bonds and inherited concentrated positions.