Newsletter: Don’t Keep All Your Eggs in One Basket

All it takes is just one stock to go to the moon, and that’s it, you’re set for life, right? Well, if it were only that simple. You see, concentrated investing, or keeping your eggs in one basket, seems to work until it doesn’t.

Now, make no mistake, concentrated investing isn’t all that bad. In fact, notable investor Warren Buffett is known to have made lots of money decade after decade because he takes big bets.

Even so, concentrated investing isn’t for everyone.

In fact, if you were to personally ask the Oracle of Omaha for investment advice, he’d likely tell you to buy a diversified basket of stocks that tracks the S&P 500 index and simply hold on to your investments for the long haul!

And why would a sage investor give such seemingly conflicted advice?

Well, that’s because Buffett knows that concentrated investing cuts both ways. You see, on the one hand, you could score big under the right circumstances or find yourself desperately holding onto a failing position that wipes away your life savings when fate turns against you.

Indeed, whether you’ve intentionally placed all your eggs in one basket or are simply trying to figure out what to do with your restricted stock or stock options, then having a plan is essential to preventing unfavorable outcomes.

And this approach starts with checking for concentrated holdings, assessing your risk tolerance to manage such a position, and then understanding how to rebalance away or hedge risk when necessary.

September Financial Independence Topics

This month, we’re diving deep into three main topics:

  • Ensuring that you’re not taking too much investment risk in any one asset
  • Steps you can take to maximize your earnings and wealth generating ability
  • How to make the most of your benefits this open enrollment season
  • Ways to turn new money into old money

Log in to the FI|Mastery Journey and get started on essential tasks to get your financial house in order!

The Big Questions

If you do nothing else this week, consider the following Big Questions to help keep your financial house in order:

Question 1

Review Your Portfolio Allocation

What would you find if you took 20 minutes today to review your portfolio? Are there any areas where you might be overexposed?

Having more than 20% of your portfolio in a single stock or sector is a concentrated position. Analyze your portfolio’s allocation across asset classes and sectors. For example, Jane found 30% allocated to her tech employer’s stock, signaling a need to diversify.

Question 2

Understand Your Risk Tolerance

How do you feel about the potential of sharp declines in your portfolio? Are your current holdings in alignment with your comfort level?

Concentrated positions carry more risk. Assess your comfort with volatility. For instance, if losing 20% of your net worth overnight makes you anxious, a concentrated position in a volatile stock may not suit your risk profile. Conversely, if you’re risk-tolerant, you may be comfortable with a larger position in a single stock.

Question 3

Evaluate Hedging Strategies

Have you ever considered ways to protect your investments while still benefiting from their growth? How about setting up a session to explore hedging strategies tailored to your portfolio’s needs?

For those of you who see potential in their concentrated holdings and wish to retain them, hedging can protect against potential losses. Strategies like buying protective puts or selling covered calls can offset declines in asset values. It’s advisable to consult a professional to determine the cost-effectiveness of these hedges for your unique situation.

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