“The quickest way to get rich is to own only one stock”.
The above quote is credited to Warren Buffett (but to be fair, I could not find that he actually said it.) Left out is,
“The quickest way to get poor is also to own only one stock.”
Yes, there are people who take big gambles, big bets. But most of us just cannot live with that much risk. Diversification is then a no-brainer. You should be diversified and you need to invest for a long time. Consider the following chart from J.P. Morgan.
By starting to invest early in life, the potential is far greater for a comfortable nest egg at retirement. The problem with the above graph, which assumes a 7% annual return, is it does not take into account the volatility (the amount return fluctuates). In investing, returns are rarely constant. Increased volatility usually equals a reduced return (not to mention causing your stomach to churn.) And not being properly diversified is the greatest contributor to volatilty.
Employer stock ownership is the most common element in non-diversified portfolios. Having a large portion of your portfolio in one stock, even if it is a stock you know well such as your employer, is extremely risky. As I discussed in my post entitled “Stock in Your Employer”, our brain plays tricks on us. Individually, we lose rationality. As I wrote in that post, “current research proves Aesop had it all wrong with his saying “familiarity breeds contempt.” Familiarity in fact breeds contentment.” As researchers found, “83.7% of Morningstar.com subscribers believed that the stock of their own employing firm was less likely to lose half of its value than the overall stock market, an effect he attributed to familiarity.”
Advisors and financial pundits love to trot out the example of Enron. A company that was flying high in the 90’s until it wasn’t. Employees not only lost their jobs, but those invested heavily in Enron saw retirement savings plummet. I had a friend who was an upper-level executive in one of the Enron subsidiaries. He said he had no idea of the shenanigans that brought down this corporate giant. We cannot know everything.
Too many studies show that we do not fully understand diversification. Our brains do not work well enough on our own to avoid undue risk.
Invest in seven ventures, yes, in eight;
you do not know what disaster may come upon the land.
Ecclesiastes 11:2 (NIV)
It seems ancient wisdom is not enough to help us avoid pitfalls in this world. We need each other. We need each other to point out blind spots, to show us where our limited insight is faulty. It is hard to admit that we need help. I have seen way too often, sometimes in my own family, the results of impaired thinking. At William F. Robertson & Associates, we help with a fresh set of eyes to analyze your portfolio. Not that we are infallible, but we can bring a more unbiased opinion to your journey and help you reach your goals.