When Too Much Is Bad

One way that many investors set up their portfolios for trouble is by keeping too many of their dollars in too few investments. That can happen if you’ve accumulated gobs of shares of stock in the company you work for. Yes, it’s great when you can purchase it at a discount and when you can easily dollar-cost average, regularly buying more shares, no matter the price, in order to build a big stake over time. You probably know more about your employer than any other company, too, which gives you an edge. Too much of a good thing is still too much, though. Just think of Enron: When it imploded, it wiped out many employees’ savings. Remember that you already depend on your employer for all or most of your income. It’s risky to depend on it for the bulk of your investments, too. You might also invest too heavily in an industry you know very well, especially if you expect great growth from it. It is indeed good to understand your holdings very well, but even if you have great confidence in them, they can disappoint you. Plenty of great companies have surprised many people, going out of business or declaring bankruptcy. Finally, you might end up too concentrated in one or a few holdings if they grow in value much faster than your other holdings — with, for example, one company going from representing about 5 percent of your portfolio to making up 20 percent of it. That’s risky, as it leaves you vulnerable if disaster strikes. Companies do sometimes fail. They may end up in scandals. Great technologies become obsolete (think of typewriters and VCRs). Excellent managements give way to mediocre managements. Competitors show up and grab market share. When it comes to your hardearned dollars in stocks, don’t put too many eggs in too few baskets. A good rule of thumb is to try not to let any holding make up more than 5 percent of your overall net worth.