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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Dirty Tricks Brokers Use to Get Your Business

There really is no great secret on successful investing for long

The New York Stock Exchange, the world's large...
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term goals. You do not have to know everything about investing to succeed, but you do need to know the right things. There is an academic method to developing a diversified portfolio, custom fit to each individuals situation. This goes against the Wall Street model that strives to keep investors in fear that they need Wall Street to guide them in ever changing directions.

Misleading tiltThere is significant research supporting the value of tilting the stock portion of a portfolio towards small and value stocks. Tilting towards these riskier asset classes can increase expected returns, albeit with increased risk. However, there are periods of time when large and growth stocks outperform small and value. For example, in 2011, large cap stocks outperformed small cap stocks.

By tilting the stock portion of a portfolio towards the asset class that outperformed in the past year or two, advisers can make it appear they have the ability to increase returns in the future. Don’t be fooled. If your adviser is recommending a tilt towards any asset class, ask to see long term data supporting this recommendation.

Using long term and lower quality bonds

By using long term (maturity dates more than 5 years) bonds, and bonds with ratings below investment grade, brokers and advisers can make it appear they are generating higher returns. Many investors don’t understand these returns come with higher risk. Historically, according to research done by Dimensional Fund Advisors, long term bonds are more volatile than shorter term bonds, but have not provided consistently greater returns. The same research indicated that bonds lower in credit quality have earned higher returns, but there is a greater risk of default.

You would be better advised to limit your bond holdings to maturities of five years or less and to insist that all of these holdings be rated investment grade or higher. You can increase your expected return (and your risk) by allocating a greater portion of your portfolio to stocks, assuming that would be suitable for you.

Using short term returns

Short term data can be extremely misleading. Some brokers and advisers cherry pick funds for inclusion in a recommended portfolio that have impressive three year returns. The implied message is that these funds are likely to outperform in the future. You can find a discussion of the benefit of longer term data here.

You should insist on seeing at least a 10-year history of returns and preferably longer.

There’s an old Chinese Proverb that says: “If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.”

You now know some of the rules of the game.

This is how most brokers compete and it does not involve the truth.

Please comment or call to discuss.

  • Their Confidence Is Killing Your Returns II (
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Diversification Is Your Buddy

Given the events of the past few weeks, many investors are considering moving their money out of the stock market.


Since no one can predict the future, this is a huge mistake.


You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong in the long run. One may get ‘lucky’ but no one can consistently market time.


In markets like these diversification is your buddy.


Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement. Simply said: they don’t do the same thing at the same time. Most investors are narrowly diversified into top performing funds or classes of the last five to ten years. They often feel diversified but aren’t. To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’. Those of you which are my clients own portfolios which are professionally diversified and rebalanced much like the large pension funds.


Over time these portfolios will help you successfully accomplish your investment goals.


To succeed in investing you must own equities….globally diversify…..rebalance.

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