About Stock Portfolios & Options

Video Transcript

"Hi. I'm Roger Groh. We're here to talk about why you would have a portfolio of stock or why you would use options. Well the answer is that you're not always going to be right. You might think that you own the best company in the world. You might think that this is really their sweet spot for the next years for growing. But you also might be wrong. So those of us that are on the professional side of managing stock portfolios typically own more than one and would like to see diversification among different industries and different companies within a portfolio. Rules of thumb for how to do that. Well there is no one right way. Let's say in a portfolio you were to buy thirty stocks and you were to break it down where a quarter of it was in food stocks, a quarter of it was in technology companies, a quarter of it might be in consumer non-durable companies, meaning things you buy every day, and then last but not least, perhaps a quarter of it is in international. That would provide for diversification. You could pick companies within there that have done a pretty good job of growing their sales and net income regularly over long periods of time through up and down cycles and the economies of the countries in which they operate. There are many that you can put into there. Now how else can you do it? Well, you can certainly buy a mutual fund which is really just a stock portfolio, or you can buy an ETF as a way to do it. Again, that's just broader diversification. Sometimes more is worse than less is beautiful. So you have to be careful and think about really in the end where your money is going. Why would you use options? Well in an option, you generally put less money up and have more upside. On the other hand, you might be wrong and in an option you're going to be wrong more, so you have to be willing to commit to a consistent program of options and bet that one out of ten times, or two or three or whatever the hit rate might be, where what you want to do really works. Is that sufficient to overcome the losses that you've had in the other parts of the program? Also, it's really easy to sit here and talk about all this stuff, but the rule of thumb in the stock market isn't whether you can make money, because over ten years you probably will, but whether you have the stomach for making money because when things get tough, you're stomach might not feel very good. So why use a portfolio? For diversification purposes. Why use options? Well it's a way to make a little bit more money but with more risk and more volatility. I'm Roger Groh."