On the surface it might seem that there are similarities between stock investing and Las Vegas style gambling. This assumes, however, that the individual can exhibit the same amount of control over both activities. In Las Vegas, the individual has no control over the game. The odds of winning are established and they cannot be altered. This could be equated to dart throwing as an approach to investing. The outcomes are completely based on probabilities. There is little or no skill involved.

             Consider another approach to investing – diversification. Risk in investing is made up of two types – systematic and unsystematic. Unsystematic risk is that risk which is associated with individual companies. It can be reduced or even eliminated through diversification. Systematic risk is that which affects all companies at the same time, and it is usually considered that it cannot be reduced through diversification. We will examine unsystematic risk first.

             The proper approach to investing involves diversifying, not only across different companies, but also across different sectors of the economy. In a given year, one sector of the economy will be up and another will be down. One year large cap growth stocks will be up and foreign stocks will be down. The next year real estate will be up and large cap growth may be down. If we knew in advance which sectors would be on top, investing would be easy, but we don"t. As a result, diversification across different sectors is necessary. Professional investment advisors agree that diversification across 7-10 sectors is adequate for most investors. For larger investors, seeking to reduce risk as much as possible, diversification across up to sixteen sectors can be considered.

             Systematic risk cannot be reduced substantially through diversification. This is because these risk factors affect the entire economy. It may be possible to mitigate this somewhat through diversification, but it cannot be eliminated.