We have all heard one financial expert after another talk abut how important it is to have your investments diversified over various types of investments and as many unrelated sectors as possible. But you’d be surprised at how many people completely ignore this advice and stick their money in just a hand full of investments, or even worse just one. In a bull market one may feel safe doing this because most things are going up, however when the market turns bearish you can loose a lot of money real fast.

The following article demonstrates a real life example of what can happed if you put all your eggs in one basket.

Original article by Andy Meek of the Daily News

Full article can be found here: http://www.memphisdailynews.com/Editoria…

“One day during the summer of 2005, Jim and Genette Chase walked into the local Regions bank office near their Miramar Beach home in the Florida Panhandle. An accountant by trade, Jim had retired a few months earlier and was eager to build a nest egg he and his wife could live on.They talked to a bank officer that day about putting the bulk of their retirement savings into certificates of deposit because CDs are insured and almost risk-free. But the Regions employee instead wanted the Chases to first speak with a broker at the adjacent Morgan Keegan office about a different and more lucrative investment opportunity.The couple eventually got talked into investing half a million dollars in a small group of Regions Morgan Keegan mutual funds, all of which had significant exposure to the now-chaotic mortgage market and throughout 2007 sustained massive losses because of it. By December 2007, the Chases had taken such a withering loss on their investment that they liquidated what little they had left in the funds.Jim Chase is a few months away from his 62nd birthday but he’s looking for a new job because of the evaporation of his retirement savings.Jim Kelsoe is the manager at Morgan Keegan’s asset management unit based in Downtown Memphis. Kelsoe earned a reputation among his peers as a successful money manager unafraid of risk in the world of mortgage-backed securities.The Chases went ahead and invested about $500,000 in the RMK Advantage Income Fund. Several months later, in 2006, they went back to Rutledge and put another $200,000 into other RMK funds. Rutledge assured the couple the investments would be exposed to minimal risk, Chase said. What the couple got, instead, was the opposite result they’d hoped for. They ended up losing so much money – roughly $504,000 – that the Chases now are working with Chicago securities lawyer Andrew Stoltmann, who recently filed a claim on behalf of the Chases with the Financial Industry Regulatory Authority. They believe they were misled into putting money into a volatile set of investments and hope to recover at least some of what they lost. “What’s insane is there are probably a million other Jim Chases out there right now,” Stoltmann said. “Here you have a guy looking for CDs, looking for fixed income, and instead he gets sold something that’s on the polar opposite of the spectrum. And those risks aren’t made clear to him.” The Chases’ claim was among four Stoltmann filed last month. One of the other investors who lost money in the RMK funds and also believes Morgan Keegan was misleading about the nature of their risks is a Memphis reporter whom Stoltmann declined to identify, citing his client’s wishes for privacy. The turn of events has proved grueling for Chase, who served in the military for three years during the Vietnam War and later worked as an auditor for various government agencies for more than 30 years. He and his wife’s RMK investments began showing a loss some time around last February. At the time, the Chases had been out of town for several weeks visiting their daughter in Kentucky while her husband was serving in Iraq. “There was a loss on paper of around $340,000, and we were just shocked,” Chase said. By October, the loss had grown by another $100,000. The Chases re-approached their broker, who assured them the funds’ long-term health was sound, Chase said. In mid-December, however, they decided to pull the plug.

Lessons Learned

You never really know what a fund manager is doing and how much risk they are really taking in order to try to increase their returns. Not to mention unscrupulous financial advisers who have their commission in mind and not their clients financial well being.

The moral of this story is NEVER and I mean NEVER put all your money into one or a small number of investments. I would recommend that the maximum you should ever have in one investment is no more then 10% of your portfolio, preferably even less. The more diversified you are the less chance there is that what happened to the Chases would happen to you. Consider what would have happened if the Chases RMK investment was only 10% of their portfolio. It would have made all the difference in the world and Jim Chase would now be happily retired instead of looking for a job. My heart goes out to the Chases for this is a true financial tragedy. I sincerely hope that they win this lawsuit and at least are able to recover a portion of their losses.

But the bottom line is that your financial wellbeing is ultimately your responsibility and we should all educate ourselves as much as possible so that we do not have to rely on other people’s bad advice and avoid making terrible mistakes.

My personal portfolio is split between stocks, bonds, real estate, gold, loans and trust deeds; and the stock portion of my portfolio is split up between over a hundred various securites. Yes I did take somewhat of a hit during this whole sub prime mess, but it wasn’t a huge hit and since most of my securities earn a good dividend I’m actually getting more shares each time the dividends are reinvested. I also took this as an opportunity to purchase some stocks and funds that where on sale because of panic selling and thereby locked in huge dividend yields in the 13% to 17% range that I will be collecting while I wait for the share price to go back up.

So be smart and always make sure that you are well diversified because it is always better to be safe then sorry.

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