Advertisement
Markets

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.

Advertisement - Article continues below

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.

To review:

  • 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.

Advertisement

About the Author

Jason Mengel, CFP

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.

Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Check Your Financial Adviser Now (and Every Year) or Regret It Later
wealth management

Check Your Financial Adviser Now (and Every Year) or Regret It Later

Fewer than 10% of investors use such free background checks as Investor.gov, BrokerCheck or IAPD to check their financial advisers’ backgrounds. These…
September 21, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020