Two Critical Investing Tools That Work Wonders

Last Friday was an awful day for Microsoft (MSFT 0.34%) shareholders, as the stock tumbled more than 11% after the company missed earnings and wrote down the inventory value of its Surface tablets. Despite that drop, the real-money Inflation-Protected Income Growth portfolio, which holds Microsoft shares, actually finished the week up $33.12 from last week's closing level.

On top of that, the iPIG portfolio still had a better than 15% gain on Microsoft's stock after Friday's close and has received more than $25 in dividends from it since picking the stock in December. There are two critical investing tools drove that huge difference between what Microsoft's stock did on Friday and how the iPIG portfolio has been performing with Microsoft as a pick: low expectations and diversification.

How those tools help
When Microsoft's stock was selected for the iPIG portfolio, its shares looked fairly priced even assuming the company never grew again -- ever. Those are pretty low expectations for one of the world's largest companies, and they're ones that Microsoft has easily exceeded, despite how this particular quarter fared versus its expectations. Just look at these key data points from the company's recent 8-K filing:

Source: Microsoft's 8-K filing on July 18, 2013..

It's because of the low expectations priced into Microsoft's stock when the iPIG portfolio purchased it that Microsoft's shares have made money for the portfolio even with this recent miss.

From a diversification perspective, Microsoft wasn't the only company with news to report last week, and strength elsewhere in the iPIG portfolio helped offset Microsoft's weakness. For instance, fellow iPIG portfolio pick Kinder Morgan (KMI -0.29%) gained a bit on the week, helped by growing earnings, revenues that beat expectations, and news of an increased dividend. Similarly, JM Smucker (SJM 0.83%), also an iPIG selection, moved up on the week -- bolstered in part by its own 11.5% dividend hike.

Similarly, both parts of the iPIG portfolio's two-for-one railroad special of CSX (CSX -3.20%) and Union Pacific (UNP -2.06%) reported earnings this past week. Both companies showed earnings improvements compared with last year, and both businesses' shares rose in the week.

For an investor, it's the portfolio that counts
Microsoft's miss hurt the iPIG portfolio for the week, but strength elsewhere made up the gap. While it would have been nice to have sold before Microsoft's drop, the reality is that no investor can perfectly predict the future. With a strategy that encompasses those two critical tools of low expectations and diversification, though, an investor can better protect his or her overall portfolio from those unexpected drops. With those strategies key in its design, here's how the iPIG portfolio finished up last Friday:

Source: The iPIG porfolio's brokerage account, as of July 19, 2013.