Staying diversified is as important as ever

Don't keep all your eggs in one basket, even a safe one. There is no safety in numbers in individual sectors.

By Jim Cramer May 30, 2013 9:23AM

thestreet logoPortfolio Account statement © Alamy Creativity, AlamyFor more than a decade now I have played "Am I Diversified?" almost every Wednesday of my life.


I know it can seem tiresome and it certainly isn't as stimulating as the ponies, Texas Hold 'Em or even Sorry or maybe Chutes and Ladders.


But the fact is that this market, this current market, is made for this game. In talking to investors I was taken aback by how many wanted to know what was really wrong with Kimberly-Clark (KMB), down five points. Did something happen at PepsiCo (PEP) that it lost almost a buck and a half? What's the deal with Colgate (CL)? Is it that Latin America is slowing?


No, none of this. In fact, PepsiCo just had a terrific presentation by Indra Nooyi Wednesday that showed me the growth is strengthening there. The raw costs of KMB continue to go down and the commitment to shareholders have never been better. Colgate's still taking share as relentlessly as it has for years now.


The issue isn't the companies, it's the cohort. While many people felt they would be safe if they spread their bets around the consumer packaged goods stocks, they got a rude awakening Wednesday that these stocks trade as one when the going gets tough, even as their fortunes are radically different.


Now, it won't stay that way. Just like the drug stocks will soon sort out between the ones that are really doing well and the ones that are just yield equivalents, the consumer packaged goods stocks will sort themselves out about who has real momentum vs. who has little-to-no growth.

But the shock wave takes everything down first and it is vital that you aren't so consumed by the blast that you leave the market entirely, which is what happened after the dotcom explosion in 2001 and the bank and housing crashes that began in 2007. At that point, too, people felt that the market would initially see that Yahoo (YHOO) wasn't the same as eToys, and (AMZN) wasn't the same as Scient or Viant.

When the market was roaring higher, being diversified kept you from outperforming as well as you may have if you only owned Procter & Gamble (PG), Colgate, Kellogg (K), General Mills (GIS) and Kimberly Clark. I butted heads with Stephanie Link, co-portfolio manager of Action Alerts PLUS, repeatedly about how many of these stocks I thought we should own. Believe me, it was easy to craft a story for each. But as the PEG rates, or the price-to-earnings multiple divided by the growth rate, exploded to above 2 in almost every case the risk just grew too great.


No matter what group, whether it be the utilities or the drugs or the foods or the master limited partnerships, there is no safety in numbers in individual sectors. They are birds of a feather and those birds get their feathers shorn when rates go higher, even if their businesses are unaffected by rates, which is almost always the case.


But look at it this way. You could own a bunch of utilities and for that you have been pulverized. So, even as "Am I Diversified?" gets tired for the gamemeister, the need remains there and, so, I guess it's game on for another decade's worth of new investors who still don't see the need not to keep all of their eggs out of one basket, even when the basket's made up of staples, the safest of the safe.




Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.



More from

May 30, 2013 9:35AM
Diversification is a good way to manage risk, but it only works as long as you're truly diversified.

Jim makes a pretty good point and we'd all do well to take a step back from time to time and study the forest as a whole, instead of concentrating on individual trees.  It's amazing how much we miss and how many mistakes we make when we don't look up from the grindstone every once in while and really get a feel for our surroundings and our place in them.  This is true for investing, business endeavors, personal relationships, etc...

May 30, 2013 12:32PM
The utility of diversification Jim is talking here is similar to the utility of using fundaments when calculating share values.  There is an implicit value you could possibly calculate but we all agree it can be important.  However, one always needs to be suspect of the path these Wall Streeters attempt to send us down.  Diversification right now is not all that important.  Calculating the time of a pullback in QE and the emotional effect it will have on overall sentiment is where the coin will be won or lost, at least in the short term..  Like a magician who is holding one arm extended out to his side, the old pros discipline themselves to be more concerned with what the other hand is doing.  If sentiment turns extremely bearish you will lose no matter how great you are diversified. Better to always have a suspicious mind and listen to as many different sources as you can.  I would say it is just as an important tool to diversify whom you listen to for advice as the equities that constitute a diversified portfolio.  Always be suspicious of the message.  JMHO   Sorry to interupt the locker room banter. 
May 30, 2013 12:43PM
Diversification needs to include real estate and cash.
May 30, 2013 9:33AM

so in other words, the tide raises all boats.  (or they go down together). 


a question comes up on how to diversify?  if "consumer products" is one block you might own, it also could be related to another industry block enough to follow in the same foot steps. 


so just buy everything..........

May 30, 2013 11:19AM
Having tried "diversification" (gold, banking, oil, REIT, etc.) and lost on all of them, I think the best investments for the long haul are indexes with ultra low fees.  I occasionally dabble in an individual stock, such as Ever Bank where my daughter is a VP and VVTV, which are doing well.  But most of my investments are with indexes where I make gains instead of losses..
May 30, 2013 11:30AM

Barry S; Should I say {Anthony Weiner].You`re not going to make a political comeback.

I don`t care if it`s a Dem or Republican, if you do something that stupid, you`re finished.

I exposed you as a fraud.You`re finished Anthony.

May 30, 2013 10:43AM
Diversification.............. We don't need no stinkin diversification....... just Bernie.
May 30, 2013 1:00PM
It´s either the Fed goes on with its QE or everything goes down. No diversification will save anyone if it happens. But, then again, it´s not likely the Fed will give up anytime soon.
May 30, 2013 11:24AM
Yes, we were just up over 80 points but we have to call it like we see it folks; too many manipulators on and off the floor, we doubt this will last, sell orders starting to come....May be a tug of war this morning...We will see; hey, they had a nice taste yesterday so they want to follow up today....Will be interesting..Never forget, crooks will always be crooks, dropping already....More later.
May 30, 2013 11:58AM

Hey Regal Meister.....I remember when I was a kid there was a comic book "Bizarro World" with Bizarro Superman.  Everything was opposite of Earth.  It was a cube shaped planet and the plant's name was Htrae (Earth spelled backwards).   Now you know where ABS NAZI BIGOT RACIST came from...he's an escapee from the Bizarro World, hence his rants and opposite viewpoints....HAHAHAHAHAHA



May 30, 2013 11:09AM
So Jimmy, if the markets eventually do Meltdown and as I suspect, won't recover for a long long time, then what? Most real Traders will be out and Perma-Longs will be trying to catch a falling knife. Only those who have diversified across solid companies with solid dividends will feel somewhat okay. Uncle Ben and the Global Feds are clearly playing a dangerous Game which will cost them nothing but the Global Economies will suffer greatly. Decades of stagnant wages will have a major COST. Decades of neglecting roads and brides, will also have a major cost. Real Folks can't buy a Home if Real Wages don't rise. At the end of the Day, that's truly what sustains and grows Real Economies, Consumers striving via good jobs and benefits. Far too many folks have little hope of being diversified as they are living paycheck to paycheck.
May 30, 2013 10:43AM

Diversification is great but instead of keeping the percentages flat across the board I like to add some  weight to certain sectors depending on where we are on the interest rate cycle. Sure you may get burned when a Black Swan event comes along (like jumping into the banks too early during 2008) but overall you should be fine.


This is all in my taxable accounts too. I prefer to let the important money in my retirement accounts do their thing and rebalance as necessary.

May 30, 2013 9:43AM

Not really sure what the Article,the largest group of those Stocks mentioned are Consumerabiles(sp).

Hardly any "diversification" outside of the Sector...

Until mentions of others in the closing remarks of the piece...

If one or two take a hit in the Sector...All of them usually take a hit...That is not diversification.


Some would argue about how many Sectors 8-10 maybe more ? I like to think there are at least 12.

If you can spread your positions across at least 10 different groups, I believe you have a much better chance of surviving in a volitile Market....And make money long term; With occassional trading.

Building long term survival or returns in a Portfolio...Should be anybody's Goal..


May 30, 2013 11:44AM

Well, I watched Fox for half an hour and my IQ went down to Rushs` level.They think

the IRS and Benghazi think are bigger than WW1 and WW2 put together.Wishful

thinking on their part.These are the same idiots that said Romney would win big last

November.If I owned a station and they were that wrong all the time, I would have handed

out pink slips to Hannity,O`Reilly,etc,etc.I bet those guys all read The National Inquirer,

the Globe,the Weekly Standard,News Max,and the Weekly weird news.Pro wrestling

is on the up and up.

May 30, 2013 12:02PM
DLH2448: Fox Is there for laughs.It`s like watching Laurel and Hardy or F troops.
May 30, 2013 12:26PM

Barry S. or should I say Anthony,I guess General Hospital doesn`t interest you.You probablythought Watergate or all of Bush`s scandals were nothing.I think it`s time for you to get the blacks at

your rest home to change your depends.I`ve got golf in 3 hours.I`m up to 210lbs.Most of me

is rock hard, but the steaks have put on the pounds at Mortons steak house.How many

McDonald`s do you have in Harlem?

May 30, 2013 12:43PM

Barry,Anthony, You should only hope to get a wife as hot as mine.How`s that taxi cab wife of yours?

Is it raining in Harlem today?

May 30, 2013 11:36AM

PENDING home sales are up (not closed and funded sales).

Markets are UP after Bernanke assures nation-killers that the spigot will keep funding our demise.

First quarter GDP "figures" revised lower now that profits stolen from the economy have been taken.

Auto LOANS (all Subprime now) are rolling at an 8-year high.


Yep... this is what your gains are predicated on today. Not one piece of reality. Go Kool Aid Go... go away.


May 30, 2013 3:38PM

Ha...I've been in Harlem and China Town, been a long time ago and I had been drinking; Young and stupid...Wonder if I would even recognize it today??


Index funds are a good safe way to spread it around, but we do not partake....Still okay..

But still believe diversification and knowledge is key..

But I don't consider 3-4 Sectors as being diversified...imo

If you go with Mutual Fs, make sure you don't have a bunch of overlap   Many do.

3-4 Mutuals can diverse you well...Or have you heavely into just 4-5 Sectors..Be aware..

Click on their "Top Ten Holdings" gives you pretty good insight..

May 30, 2013 4:07PM
Well, no real surprises down here...We were able to stay in the green but not the way it should have been....Manipulators started doing their thing once again right before 1500 hrs and from being close to triple digits we ended up  21 points, at least the S&P picked up 6...Never ever underestimate these crooks, they are and always will be here to do their thing and try to bring us down...We are used to it down here....Oh well, we will see what tomorrow brings.
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