Don’t fall in love…with a stock.
Many people develop an unhealthy obsession with one company and own far more of a stock than they should. Stocks are risky as we know. The market can fall 30% almost overnight. But each individual stock can also fall by a lot even if the rest of the market doesn’t. When you diversify your portfolio and hold small amounts of many different stocks, which is what you get when you buy stock mutual funds, you get rid of the risk that any one company’s problems will impact your wealth too much. Many people fell in love with Netflix which is down 24% in the last year, and Facebook (Meta) which is down 10% in the last year, and Peloton which is down 83% in the last year. But what makes these returns worse is that mutual funds that hold a diversified portfolio of all U.S. stocks are UP 12% in the last year. Investors should think more like robots. Let’s say you own $300,000 of a particular stock in your retirement account and that is 30% of your $1 million portfolio. It may be something you invested $50,000 into a while back. Many people choose not to sell any of that holding. Now ask yourself how much of that stock you would buy today if you didn’t own any of it but had $300,000 of cash in the account. Very few people would spend all the cash on that one stock which shows that people make decisions irrationally since their desired position is based on a starting point that no longer matters. A robot would just decide how much of the stock is right for its portfolio and buy or sell as necessary without regard for any historical data that has nothing to do with the right exposure today. A diversified portfolio gives you market returns without the risks that come from owning too much of one company. (Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)
Larry Pike, CFA
Financial Advisors LLC
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