Good morning & happy Monday!
“There is no such thing as a worry-free investment. The trick is to separate the valid worries from the idle worries, and then check the worries against the facts.”
Peter Lynch
Since Sunday is Halloween, I felt that this might be a good week to discuss how scary a lack of diversification is.
I know, I know, lack of investment diversification probably does not crack the list of top 10 scariest things for most people, but as a financial planner, I am fully aware of how terrifying it really can be.
Here’s my philosophy: we will never own so much of one stock to make a killing or get killed.
Here’s how we put that into practice at Intentional Wealth. If I have a client who is a huge fan of a particular stock (maybe a former employee of the company, maybe they inherited it, maybe they just really like the company) and they want to have a concentrated position in it, that is no problem for me … as long as it does not exceed 10% of their investment portfolio. Anything north of 10% does not get my blessing, but I won’t throw a fit until it hits 20%. If we hit that 20% mark, the risk exposure to my client becomes far too great for me to be comfortable with. It’s scary.
“But it’s a great company.” “My grandfather told me to never sell the stock.” “The way the market is going this stock is only going to soar.” I’ve heard it all, and oftentimes the rationality is fairly strong. My response remains the same: don’t do it.
The list of “solid” companies that have lost (oftentimes very quickly) a significant portion of their value is reasonably extensive: Enron, WorldCom, JC Penny, Sears, Montgomery Ward, Kodak, Circuit City, Blockbuster & Pan Am, just to name a few.
I live & work in Polk County, FL, headquarters for Publix supermarkets. I love Publix and my family shops there frequently. Publix stock is exclusively owned by their employees and throughout my career I have run across a tremendous number of Publix people who have the vast majority of their investments (in many cases pretty close to 100% of their investments) in Publix stock. Regardless of how great the company is, regardless of the stock’s track record, regardless how much one believes in the company … my advice is always the same: diversify away the risk of having a significant portion (or even your entire) financial wellbeing tied to how one company’s stock performs. The stakes are just way too high if things don’t go well.
But rather than boring you with statists (which I am very capable of doing 😉), please allow me to share a personal story.
The year is 2008, I am 28-years old and I was working at Wachovia Bank as a Financial Specialist (investment & loan officer). Wachovia stock for the majority of my nearly 10-year career was trading around $60/share. Well, the banking industry started coming under pretty significant pressure and Wachovia stock went down to around $40/share or so. Well, I thought to myself “what a great buying opportunity” and I moved a portion of my 401k into Wachovia stock (about 25%). Needless to say, that was a HUGE mistake. At one point during the market correction of 2008/2009 Wachovia stock traded under $1/share. Wells Fargo purchased Wachovia for $7/share in October 2008.
Sometimes life’s most valuable lessons are learned not from a parent, not in college, but in the school of hard knocks. It is the one and only time in my entire career that I broke my own investing rule … and it was a costly lesson for me to learn. Please learn from my mistake … a lack of diversification is a scary thing to be avoided.
Please never hesitate to reach out to me or anyone on my team if there are financial matters we can help you address. It is an honor to serve you.