The Hidden Risk of Being Too Invested in Your Own Company
Imagine you love chocolate and peanut butter, but you know that eating just those two things all the time wouldn’t be the best for your health. You need a mix of different foods—vegetables, fruits, proteins, grains—so your body stays strong and balanced. Similarly, in investing, even if you love one kind of stock or asset (like tech stocks or real estate), it’s risky to put all your money into it. By “mixing it up” and investing in different types of assets, you ensure a balanced portfolio, just like a balanced diet keeps your health on track.
If you’ve worked hard for a company and have watched it grow, it’s natural to feel confident about its future. You may even have significant portions of your savings invested in its stock, believing that your intimate knowledge gives you an edge. But while there’s nothing wrong with being proud of your work, there can be serious financial risks if your portfolio is heavily concentrated in your own employer’s stock or even in the industry you know well. Let’s explore why diversifying beyond your company is crucial for your financial security.
Why Concentration Feels Comfortable
Many people accumulate stock from their employer through incentive plans, discounted purchases, or simply because they feel a sense of loyalty to the company they’ve helped build. There is a feeling of control—you know the ins and outs of your industry, you understand the company’s strengths, and it feels reassuring to invest in something so familiar. But this comfort can mask underlying risks. Just like that familiar old couch might feel comfy, but you know it’s one wrong move away from collapsing under you.
The Hidden Dangers of Concentration
The problem with concentrating your investments in your employer or industry is that your financial future becomes too closely linked to a single entity. When your paycheck, your benefits, and your retirement savings all depend on the same company, you’re putting all your eggs in one basket. And let’s be honest, who wants to carry around a basket full of eggs when one trip-up could leave you with a mess? If the company runs into trouble, you could be hit from multiple sides—a falling stock price, potential layoffs, and the loss of income. This creates a dangerous level of vulnerability.
Consider what happened during the 2008 financial crisis or more recently during sector-specific downturns. Employees who held large amounts of company stock often faced financial devastation, with layoffs coinciding with significant drops in the value of their savings. Even the best companies can encounter unforeseen challenges—regulatory changes, industry shifts, or unexpected competition can cause sudden drops in stock value. Even Superman has kryptonite.
Diversification: The Best Defense
Diversification is like having a balanced diet: just as relying on only one type of food can lead to malnutrition, relying on a single company for both your income and investment growth can lead to financial instability. By spreading your investments across different companies, sectors, and even asset classes (like bonds, real estate, and international stocks), you reduce the risk of losing everything if one company or industry faces a downturn. Plus, a little variety keeps things interesting—after all, who wants to eat peanut butter for every meal? Sure, it’s great, but even peanut butter lovers need a little jelly every now and then.
It’s not about abandoning your belief in your company or its potential; it’s about adding a layer of protection for your financial health. By investing in a mix of assets, you make sure that even if something happens to the company or industry you work in, your broader portfolio is still intact and working towards your long-term goals. Think of it as having an extra stash of chocolate hidden away—if the main supply runs out, you’re still covered.
How to Get Started
If you find that your portfolio is heavily weighted toward your employer’s stock, consider developing a plan to gradually reduce that concentration. This can involve setting up a schedule to sell portions of the stock and reinvest in other areas. It’s important to make these changes carefully, keeping in mind tax implications and other factors. Slow and steady wins the race—and, luckily, we’re not actually racing anyone. Unless, of course, you’re in a race against your future self wondering why you didn’t diversify sooner.
Working with a financial advisor can help you figure out if you are overly concentrated in one position or industry, and create a strategy that protects what you’ve built while taking advantage of opportunities to grow your wealth in a more balanced and diversified way. Remember, the goal is not to completely sever ties with your company, but to ensure you are not overly dependent on any one source for your financial future. Think of it like having a backup plan—because who wants to rely on just one thing when you could have a plan B, C, and D?
Take Action Now
If you’re not sure whether your investments are properly diversified, it might be time to review your portfolio. Diversifying can mean the difference between facing a crisis with confidence or finding yourself overly exposed to risks you didn’t see coming. Let’s face it, financial surprises are rarely the fun kind—like finding an unexpected twenty-dollar bill in your pocket. Let’s work together to make sure you’re prepared for whatever the future brings. After all, a little preparation now can save you from scrambling to make an omelet out of broken eggs later. If you would like to schedule a meeting, please give me a call at (215) 348-3176, or email me at Charlie@paragon-wealth.com.
About Charlie
Charlie McNamara is a veteran of the financial services industry. Since 2000, Charlie has brought an extraordinary level of knowledge and experience to the financial field. After obtaining a business finance degree from Delaware Valley University, he began his career as a financial advisor with Prudential Financial in 2001 and was promoted to management in only three years due to his hard work and dedication.
Born and raised in Doylestown Borough, Charlie is married to his wife, Lisa, who is co-owner of the local salon Moxie, and is a proud father to his daughter, Carissa, along with two dogs and a cat. He enjoys weightlifting, running, golfing, fishing, and giving back to the community through his church, Our Lady of Mt. Carmel, and local organizations such as the Travis Manion Foundation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Any securities mentioned here are for informational purposes only and are not recommendations to buy or sell any security.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Paragon Wealth Management and Great Valley Advisor Group are separate entities from LPL Financial.