Most people don’t have to be a financial planner to know the saying “don’t put all of your eggs in one basket.” Many people are even aware that they should be properly diversified, but even so, time and time again we come across individuals that own too much of one stock. The most common ways we see the accumulation of one stock is:
- Working for a company and buying the stock in your retirement plan or you’re awarded stock options over time
- Getting a stock passed down from generation to generation and calling it a family stock, and not wanting to sell
- Simply falling in love with one “safe,” or best company stock and accumulating the stock over time (we see this a lot with Apple Inc).
Through speaking with various individuals about their investments, we find that they are prudent in not owning 30% of their nest egg in Bitcoin, Tesla, or the next best pharmaceutical company. Although what happens when someone owns too much of a well-known company’s stock that has performed sound over time? It can give a false sense of security. We’ll encounter comments like the following – “Verizon will always perform well and provide income,” or “Walmart will never go out of business and is recession proof,” and “Apple is just going to keep going up!”
These are comments that are thrown around by investors of all levels that become opinionated and attached to one stock. This can create a real problem for pre-retires and retires who are heavily over weighted in one individual security.
We all witnessed this with the performance of General Electric’s stock in 2017. Many people believed GE was one of those safe stocks that would continue to pay a nice dividend and provide growth for retirement portfolios. Over the last year, General Electric is down over 50% while the S&P 500 is up double digits. Many former GE employees are now under funded for retirement due to this downturn and have seen their retirement portfolios take a big hit. With 43% of GE stock owned by individuals and 140 billion of market cap wiped out over the last year, that is over 60 billion of retirement funds gone in a single year. This is causing retirees who thought they were properly funded for retirement back on the job search or having to cut back on expenses lowering the quality of life they envisioned in retirement.
We like to bring this to investors’ attention, not to pick on the poor performance of GE, but to point out the very real possible effects of what these safe, well-known stocks in the market can still do. So, if you own or are going to own an individual stock, how much is ok? While you are still working and still accumulating assets we would recommend no more than 10% and as you retire and are on a limited income, no more than 5% allocated to one position. This is just a rule of thumb and can vary with each person’s individual circumstances.
This is just one example of why diversification is so important on your road to retirement. It will allow you to mitigate risk and ride out the ups and down of the market all while being able to sleep knowing that you’re not vulnerable to whatever “safe stock” is the next General Electric.