The number one rule that every investor knows is to “diversify your portfolio.” It couldn’t make more common sense than if Mr. T himself were to jump out from around the corner and say it as it is. Diversifying one’s portfolio makes perfect sense as the only effective tool to soften the blow of losses in a dangerous market. Yet diversification can also serve as a Trojan horse when it comes to the pink sheets, where penny stock investors (PSI) come to apply the rules of the game they’ve learned from trading on the upper exchanges.
From a practical standpoint, it is wise to invest only a certain percentage of your portfolio into penny stocks (NEVER invest your entire portfolio into penny stocks). This is an intelligent form of diversification. Penny stocks must always be considered speculative, and it is wise to dip your hands across the risk spectrum for a balanced portfolio fit for you. However for the fool who ignores this advice, diversification entirely on the lower exchanges will NOT mitigate your losses more so than investing into a few companies.
For the unfortunate fool who finds himself heavily invested in penny stocks, diversification results in a capturing of the lower exchange market as a whole. Yet unlike the upper exchanges, we have already established that the lower exchanges are hindered by the pink sheet gravity. Diversification on the lower exchanges results in the downward momentum of your portfolio.
Proper commitment to the procedure of research and confirmation will give way to proving that some lower exchange companies stand high above the rest in regards to their inherent value to the industry. Out of the amount you’ve set aside for penny stocks, invest heavily in these companies at the ideal times.
As a rule of thumb, whenever possible, aim to try to own at least 1/10,000th of the company’s outstanding common stock. Depending on how wealthy you are, this fraction can vary accordingly. When considering that decent money on the upper exchanges will tend to buy you a fraction in the 1/100,000th to 1/1,000000th range, it is wise to exploit the advantage of the lower exchange market – low market capitalizations. If you find that your investments in your portfolio are nowhere near accomplishing this fraction, consider tightening the amount of companies you’re invested in.
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