Think about the jobs you’ve had. Some of the companies have probably gone out of business.
In my own experience, I can count a restaurant, a magazine, a newspaper, and a clothing store that no longer exist. Other employers were sold or merged into something new.
As financial advisors, we see clients asked to take on new roles, relocate, or face layoffs. These shifts often reflect broader changes in technology and the economy.
All these changes are just business, but they hold important lessons for how we should invest.
No one can predict which companies will struggle or succeed. When I took my first retail job at 16, I never imagined that company would close. Likewise, we can’t foresee which stocks will soar due to innovation or collapse due to scandal or obsolescence.
Smart investing starts with the key principle of diversification—acknowledgement that we don’t have a crystal ball—but we often see people relying heavily on one stock or one sector.
All eggs in one basket
A classic example is when a client favors a single stock. It may be inherited stock, company shares from an employer, or simply a favorite investment. When any one position makes up too much of your portfolio, it’s called a concentrated position.
Your investment may look amazing today, but plenty of big companies have nosedived over the years—Enron, WorldCom, GM, Lehman Brothers, RadioShack. A major utility company listed on the NYSE has gone bankrupt twice.
Concentrated stock positions carry substantial risk.
Even if you’re not investing in the markets, putting all your extra money into one asset—like your home—still counts as a concentrated portfolio! It’s simply a 100 percent position in local real estate!
Going with what you know
Some investors may not favor a single stock, but remain committed to a particular industry. In Texas, that often means oil and gas. Someone works in the field, their friends do too, and they know the business well—so they invest their paycheck back into more oil and gas stocks.
This is called familiarity bias—investing heavily in what you know and trust. We also see this in tech, where employees double down on stocks in their own industry because they believe in its future.
Buying the index
There’s one more strategy worth discussing in this context, and it’s often promoted as a fix for concentration risk. This approach is the single-fund strategy—like investing in a total U.S. stock market index or an S&P 500 fund.
While this is an improvement over single-stock or single-industry investing, it still offers limited diversification.
These funds hold hundreds (or even thousands) of companies, which sounds diversified. But here’s the catch: 9 of the top 10 holdings in both U.S. total stock market and S&P 500 index funds are the same tech-heavy U.S. giants, making up more than 30% of the funds’ value.
So, asking someone if they’re comfortable tracking the S&P 500 is really asking: “Are you okay having over 30% of your portfolio in tech?” For some, that’s fine. For others, it may be too much.
Conclusion
A resilient portfolio doesn't chase perfection. It strives for balance. That means diversification across stocks, bonds, sectors, and regions. It may mean stepping outside what feels familiar to you.
Back to the examples of dead companies I started with. All of those tanked in the 21st century. Looking back further in time only drives home the point that times change—often dramatically over a short period.
My mom, who was one of 7 kids, grew up picking cotton and peaches on an Arkansas farm in the 1950s. Just a few decades before that, most people were farmers, and if you were a woman with a job, you were probably a household servant.
We have no idea what will happen next year in the world or in the markets, but we can be certain it will not be the same as this year. Ten and twenty years from now, the economy will look even more different. Plan accordingly.
If you’d like to discuss your investment strategy with a team of financial planners, please reach out.
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There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Stock investing includes risks, including fluctuating prices and loss of principal.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.