Being Married to a Stock

Some people lose sight of the reason for and purpose of investing. The clients I consult with have as their primary purpose of investing to ensure their long-term financial security. However, some of them become overly attached to certain stocks they own, creating an added or unnecessary risk to their portfolio. In effect, they become “married” to a Company’s stock.

When managing your investments, no stock should be off-limits to be sold. Further, there should be some built-in protection to stop a stock from becoming overweighted in your portfolio. That protection should be to not let a stock become more than a certain reasonable percentage of the total portfolio. That percentage should be decided upon beforehand and should not be increased lightly.

An example of how this would work is to assume that you created a diversified portfolio of 25 stocks and decide that once a stock reaches 12% of the value of the portfolio, shares would be sold to bring it down to 8% of your portfolio (which is twice the weight of the average of the 25 stocks). This would let you take some cash out of that company and have it redistributed to your other stocks or allow you to add a new company. You would also still own a substantial amount of that company, with 8% being double the 4% average of the 25 stocks. Selling some shares does not mean you do not like the company; it just means that you want to reduce your risk in that company. That way, the stock would not get too “mad” at you.

Investing should be done in accordance with a plan developed after your goals are decided upon. Decisions should be made impassionedly based on how your long-term goals would be attained. Setting aside a stock you are “married” to might thwart your planning and cause you to miss your goals. The basis of any sound plan should be a well-diversified portfolio. That also means that nothing should be out of bounds of being sold in favor of keeping it “forever.”

Some of the stocks that clients are or were married to are Amazon.com, Apple, AT&T, Disney, Federal Express, General Electric, General Motors, IBM, Merck, and Tesla. These are all well-known companies. I am not suggesting that these are good or bad investments, and some have done extremely well in the stock market. However, some have done terribly and greatly underperformed the market as a whole. Each client had their personal reasons, but I suggest that investing in a small number of individual stocks you intend to keep “forever” is not the way to secure your long-term financial security.

Consider your goals, plans and reasons for investing and then construct a portfolio that would give you a reasonable chance of attaining those goals. Being married to one or two stocks might be good, but it also might not be, and that is a risk I do not think you should incur.