With Stocks: Too Much of a Good Thing Might Not Be a Good Thing
That stock that did so well for you over the years? Don't get so attached that you hold back when it's time to rebalance.
In a diet, fiber is good. Dietitians encourage us to incorporate it into our daily nutrition. But balance is also important, so we diversify our food intake by adding other nutrients.
So, yes, fiber is good, but too much of a good thing can throw your system out of whack.
Loyalty has no place in investing
As simple as that sounds, the same concept pertains to your investments — in particular, over-allocating your portfolio to a single stock. Maybe that stock has treated you well for years, and as a result, it has earned your loyalty. Perhaps you purchased the stock for many years because it was the company you worked for, or maybe you inherited it.
As a result, the decisions you are making — or failing to make — about the stock could be based on an emotional attachment rather than what’s financially wise.
Mixing emotions with investments rarely provides an upside, and too often, the risk is greater than the reward.
The solution is to look at your portfolio objectively, and for that, you may need guidance from a financial adviser. Ask yourself, “What can I gain, and what could I lose?”
You only need to look at what happened in 2008-09, when the stock market took a tumble, to know the financial impact if you’ve placed all your eggs in one basket. You should manage your risks rather than take risks.
It’s important to manage your portfolio through diversification. Incorporate different asset classes, such as equities, fixed income and cash.
- Investors often over-allocate a portfolio to a single stock.
- Mixing emotions into investing needs to be avoided.
- Concentrated holdings in one company should be avoided because doing so poses far greater risk than potential reward.
- Investors need to stay diversified across asset classes, sectors and styles.
- Investing is a process of managing risk, not taking risk; asset allocation is key for long-term investing.
- The overall risk increases dramatically when one stock comprises a large portion of someone's portfolio.
- An investor who holds a large position in one company should develop a plan to either divest or hedge his or her risk.
If you haven’t rebalanced or taken a look at your overall asset allocation, now is a great time to do so and make needed adjustments to bring your allocation back to your target.
In other words, buy some more baskets and spread those eggs around.
Rozel Swain contributed to this article.
About the Author
Co-Founder, Fusion Capital
Jason Mengel, originally from Atlanta, Ga., currently resides in Isle of Palms, S.C. He holds a CERTIFIED FINANCIAL PLANNER™ designation and is a member of the Financial Planning Association. Mengel graduated from Wofford College in Spartanburg, S.C., with a B.A. in Finance.