One of the most financially dangerous traps people fall into in the world of investing is getting married to a particular stock. You may be married now and not even know it. If you have a stock in your portfolio and would never think of selling it under any condition, than you’re probably married. We get into these relationships in many ways. Perhaps they are shares of a company you work for or you were gifted the shares from a parent or grandparent. Some people even purchase shares of a company in an industry that they follow thinking that their knowledge gives them an advantage.
Anytime we get emotionally attached to an investment our judgment usually gets clouded. We forget the main purpose of owning the stock. It’s not about sentiment. It’s about return.
If an investment represents too large a proportion of our total portfolio we are putting our financial future at undue risk. This is especially true if you work for the company. Many companies make it very attractive for employees to purchase stock. In these companies you can purchase stock at a discount in an Employee Stock Purchase Plan and own shares in your 401(k). I have seen many people that have great confidence in their companies max out their contributions to both plans making their holding of that one stock a very large percentage of their total portfolio. This can lead to a nightmare scenario where the company falls on hard times and the stock price tanks. Worse yet, the company folds or institutes layoffs and you lose your job. Think Enron, WorldCom, Lucent, and so many others. Employees that drank the company Kool-Aid may have a large amount of their life savings invested in the company they work for and then POOF – it’s all gone.
There are very few people in a company that actually know the true financial story of the company and I can pretty much guarantee that you’re probably not one of them. Even the Wall Street analysts only know what the company wants them to know. Good companies are good – until they’re not. By the time you realize there’s a problem it will most likely be too late. Remember Lucent? Everyone kept saying it would come back – but it never did.
Any investment, regardless of how you came to own it, is just a tool to get a return. A stock may have been a great investment when your grandfather worked for the company but we live in a much different world, different economy. GM stock was held by generations and treated like a treasured family possession. Then the financial crisis happened. Would granddad really have wanted you to ride the stock into the ground?
All investments should be looked at as part of your asset allocation dictated by your financial plan. The minute we get sentimental about an investment, for whatever reason, we open ourselves up to undo risk that we otherwise would probably never take.
If you are suffering from the wedding bell blues with an investment perhaps it’s time for a divorce.
David J. Seibel is founder and Managing Partner of AGS Aurora Financial Services LLC (www.agsaurora.com), an independent financial advisory firm in Matawan, New Jersey. You may contact him by email at email@example.com.
Investment Advisory Services offered through Global Financial Private Capital, LLC a SEC Registered Investment Advisor