Listening to Sky Business today, the hosts and I were shocked to hear one caller say that he had his life savings in Liquefied Natural Gas Ltd (ASX: LNG) (LNGL), and he wanted to know what to do.
LNGL is developing one of the first export liquefied natural gas (LNG) plants in the US but has yet to begin production. Thanks to the boom in US shale gas production, the US only recently allowed gas to exported, and more than a few companies are rushing to set up processing plants to export gas/LNG.
Unfortunately for LNGL, the oil price has crashed over the past 2 years, from above US$100 a barrel to under US$40 a barrel, taking gas prices with it. As a result, LNG's share price has plunged from $5.00 a year ago to 47.5 cents currently.
Can you imagine investing your life savings chasing the share price up to $5.00 only to see the share price crash, and lose 88% of your entire life savings?
That highlights one of the major problems investors can make and one of the most important investing strategies.
Diversification.
That means investing your life savings across a number of shares in different sectors, and not piling it all into one. Even the experts will get share picks wrong, as famed investor Peter Lynch noted, "If you are good, you're right six times out of ten. You're never going to be right nine times out of ten."
Last year, we wrote a series of articles of how to set up a diversified portfolio, and we've often written about the importance of portfolio structure. That means holding a core portfolio of solid shares, a portion of the portfolio allocated to stocks that can provide growth, and finally an optional small portion of your portfolio allocated to speculative shares.
Unfortunately for the caller to Sky Business, LNGL sits firmly in the speculative space, given it has yet to generate any revenues or earnings, and may never.
Foolish takeaway
As many investors who have most or all of their entire portfolios in shares in the big four banks have found out in the past year, diversification is extremely important – perhaps the most important rule when it comes to investing.
