Love Your Company, Not Its Shares

Loyalty is a very admirable trait, one which is seldom seen in our society as much as it should. However, when investing diversification is a key element to success. Sure, if you are lucky you can win big, however if something happens at you company you could lose big as well.

Stock certificate for 10 shares of Birmingham ...
Stock certificate for 10 shares of Birmingham Motors automobile company (Photo credit: Wikipedia)

The key is to open your mind to negative news concerning the stock you’ve loaded up on and stay objective. This negative news may end as a tsunami, but it doesn’t start that way. It starts as one ripple after another. Savvy investors are attuned to these ripples, watching for the point where they turn into rising waves. Any winning portfolio contains losing stocks; it’s the average performance that counts, relative to the weighting of different stocks.So when you get ready to load up on your company stock, look inward to see if you are doing so out of behavioral bias. If your knowledge of the company or your identification with it were the same as it is for the typical stocks in your portfolio, would you be inclined to buy so much of it? If you’ve already pulled the trigger and bought a lot of this stock and it has been sliding for too long, be willing to admit that you’re human.

The danger of owning too much of your company stock is if something happens you could lose both your job and your investments. Diversification remains one of the most powerful investing tools available.

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