When it comes to investing, diversity is often claimed as a critical part of managing risk. The idea is straightforward: don’t put all your financial eggs in one basket. Yet for many people, an exception to this rule is when it comes to owning stock from the company they work for. It’s natural to want to have a stake in your employer’s success, but how much is too much?
In this article, we explore the question of how much stock from one company is safe to own. We offer insights on the benefits and potential pitfalls of having a large part of your investment portfolio tied to an individual stock and how you can reach a balanced and stable investment strategy.
The Risks of Investing in Any Single Stock
Individual stocks are much riskier investments than a well-diversified portfolio. Why is that?
Here are a few kinds of risk you are exposed to when you hold any single stock, or if your portfolio is heavily invested around one single stock:
- Management risk: A company may have a stellar history of management, but there are no guarantees that won’t change in the future. A change in management, like a CEO stepping down, can cause a significant shift in how the company performs, the future prospects for the company and, in turn, the current price of the stock.
- Industry-specific risk: When you are invested in a stock, you are also invested in that industry. If this industry takes a hit from world events, supply chain issues, changing consumer demand, or rising costs, your individual stock can also go down in price.
- Legal risk: If the company of the stock you hold gets into legal problems, it can lead to investor concerns, and the stock price could drop.
- Technological risk: Technology is continually changing and advancing. It is nearly impossible to predict these changes, and when major advancements in technology occur, it could render an entire company or industry obsolete.
Lastly, the more you concentrate your investment in a single company, you also run the risk of becoming emotionally invested in the company. When the company you’re invested in doesn’t do well, this can lead to sub-optimal investment decisions (e.g., selling at low prices).
When you have most of your money concentrated in any single stock, if something goes wrong, you stand to lose a significant portion of your investment. But this can be avoided.
The Importance of Diversification
Diversifying your portfolio gives you exposure to companies and industries that appeal to you without the danger of putting all of your eggs in one basket.
There are many factors outside your control, such as future company performance, industry changes, and world events.
Diversification means spreading your portfolio across different types of investments, and across many different companies in many different sectors, industries, and geographies. This reduces the risk that you will lose all your money to any single investment.
At T.M. Wealth Management, we understand how to build well-diversified portfolios suited to your individual circumstances.
The Bottom Line
With any investment, you need to consider your risk tolerance and goals before you make a purchase. All investments carry some amount of risk, but diversifying your portfolio can help you minimize the risks of owning concentrated positions in any specific asset, company, or industry.
So when it comes to how much stock from one company is safe to own, the answer depends on your needs, goals, and risk tolerance.
Your Success Starts Today
Investing independently without the right support can prove to be quite challenging and, at times, overwhelming. It’s similar to navigating a hike without a map or a clear destination in mind. To build confidence in your financial strategy as a high-net-worth individual, partnering with a wealth advisor can help you sort through the complexities of your assets. When you choose to collaborate with us at T.M. Wealth Management, you gain the assurance of having a trusted companion guiding you on the path toward financial independence and sustainable wealth.
Through the process of crafting a comprehensive financial blueprint, we take a holistic approach that considers all the unique facets of your financial situation. We apply creative thinking to help you recognize and reach your financial objectives, all while maintaining a vigilant eye on your plan’s progress to keep you on course. Our commitment to transparency and open communication means we will be there with you every step of the way. To get in touch today, we invite you to give us a call at (703) 537-8351 or email firstname.lastname@example.org.
Thomas R. Seneca is Managing Partner at T.M. Wealth Management, a wealth management firm that focuses on independent, boutique, and fiduciary services for clients. After gaining extensive finance and investment experience working as an investment banker on Wall Street and in Silicon Valley, Thomas had a desire to work more closely with clients and positively impact their lives by helping them make better financial decisions. He started his own practice and now works with successful professionals to help them simplify their financial needs and optimize their wealth to pursue their goals. Thomas knows the positive impact that good financial decisions can have on families and individuals, and he strives to help give clients financial confidence so they can spend their time on what matters most to them.
Thomas holds a bachelor’s degree in economics from Brigham Young University and an MBA from Columbia Business School. Thomas is an avid golfer, fluent in Spanish, and served as an adjunct finance professor at Virginia International University in the Washington, D.C., area. Outside of work, he enjoys traveling, spending time with family, and attending church. To learn more about Thomas, connect with him on LinkedIn.