Monday 27 August 2007

Why You Need to Diversify

An interesting example of why you need to diversify your investment in the stock market across several companies, no matter how good one particular stock may appear to be. Tabcorp is an well-regarded company that gets a significant part of its profit from the NSW horse racing industry. It had enjoyed good stock price appreciation in the years leading up to 2005, but has been stuggling in the past couple of years, as shown below. Last Friday an outbreak of horse 'flu meant the introduction of a total ban of the transport of horses around many areas of NSW and the cancellation of horse racing around the state. Tabcorp has estimated that the cancellation of horse racing next weekend will cost it $150m in revenue and reduce Tabcorp's group earnings by approximately $5 million after tax. Depending on whether or not the outbreak has been sucessfully contained, there may be effectively no spring racing season in NSW this year, which would have a disasterous impact on this years profit for Tabcorp. There is simply no way to predict such random events, so putting all your investment eggs in one basket is very risky, especially since there are lot more stocks that do exceptionally badly than there are stocks that have a meteoric rise.

Copyright Enough Wealth 2007

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