August 19, 2008 - Nobody ever said investing is easy. If they did, they've never done it. It's emotionally draining, intellectually challenging, and unbelievably frustrating. Especially when markets are as volatile as they are today.

One day oil stocks are hot while financials get pounded. The next day, pharmaceuticals fly because one company has a breakthrough medicine while home builders have only sellers. The market doesn't move as a whole. It's a market of stocks, not a stock market.

If you invest, expect some blows, right to the solar plexus, ones that take away your breath and money. It's part of the experience. You don't have to like it. You do have to expect it and be prepared for it. Because it's coming.

No one is exempt. Don't think the talking heads on tv always buy stocks that only go up. Or that they've timed the market perfectly, to be out when it's falling only to jump in as it turns around. That doesn't happen, except in novels. Even Warren Buffett makes some big mistakes, and he's the best there is.

The difference, however, is that his big mistakes don't wipe him out. They're manageable even though they're very large. They only represent a small percentage of his total portfolio. And that's the key to survival in the stock market: limiting your investments to what you can afford to lose in any one stock.

Because sometimes stocks go away, bankrupt from management's ineptness or natural market competition. It doesn't matter how they disappear, the important thing to remember is that they do. And they take all your investing dollars with them.

If there ever was a time to be well diversified, it's right now. With stock volatility at extremes, the only way to keep your lunch where it belongs is to have several different, uncorrelated sectors with at least 3 or 4 different stocks in each sector or mutual funds with broad diversification. While there are days when all sectors are pounded equally, they are very few. Most of the time, when one sector is out of favor, another is seeing cash inflows, as money moves from offensive to defensive or the other way. A more bullish emotion would have investors buying a lot of tech stocks and selling drugs stocks. On a more depressing day when the news is all bad, the exact opposite could happen as investors flee to the "safety" of pharmaceuticals.

Fits and starts, spikes and flops. That's the market we have to deal with at the moment. It isn't easy to watch or feel. But if investors allocate their funds among diverse investments, including real estate, bonds, savings and stocks, no one of them should be large enough to endanger your well being (and wealth) if the worst happens. Similarly within your portfolio, no one stock should jeopardize all your holdings.

Real investing winners are ones who withstand whipsaws of the market over the long haul, holding on to their best stocks, finally emerging triumphant when the market surges upward for a sustained period. The only way to make sure of survival is to diversify out risk as much as possible, knowing full well that risk is part of every investment.

- Ted Allrich