The Two Biggest Mistakes Investors Make – Part 1
Concentrated Investing: How to Avoid this Investment Blunder
By Tom Kirk, CPA-PFS, president and Founder, FirstWave Financial
Over 90% of investors do not capture the returns that the market provides. Why is this? The two biggest reasons are concentrated investing and attempting to time the markets. This blog post addresses the problems with concentrated investing.
Concentrated investing is putting too many of your eggs in one basket. This one basket can take on many different forms. Obviously having all your money in one stock would be a concentrated holding but so is having it all in only a few dozen individual stocks, or even having all your money in 500 different stocks but all of one type of stock like the S&P 500, which is all U.S. large company stocks. Some investors using several different mutual funds are surprised when they find out their mutual funds invest in many of the same companies. This overlap of holdings can create unwanted concentration in certain companies or parts of the market.
A concentrated investment strategy can lead to increased risk and reduced returns.
It is tempting to think that you know some information about a particular stock or part of the market that will contribute to the future growth of its stock price, like an article you read about the promising future of solar energy, a drug breakthrough by a pharmaceutical company, or why defense company stocks will do well in light of current hostilities. Then, based on this information, you put your money into those individual stocks or parts of the market where you expect the superior returns to occur.
While all these statements may be true, the problem is everyone else already knows this information too and has already bid up the current prices of the stocks, actually decreasing their future returns. The only people who actually know positive information about a company before anyone else does are insiders, and for them to use this information to their advantage is illegal.
Much of the financial news industry is built upon this merry-go-round. They tell you what is hot, but if you react to this and buy based on this information, you are usually too late. So your future returns are not what you hoped. Then, you look for the next hot stock or part of the market and move your money there, only to have a repeated unsatisfactory experience.
A better strategy is to design an investment plan that is based on a globally diversified portfolio that captures the first wave of stock performance while managing the overall risk of the portfolio at a level acceptable to you.
Contact us today to schedule your complimentary consultation with one of our WealthCoaches.
About the Author: Thomas L. Kirk
CPA-PFS President, Founder and WealthCoachTM
- Certified Public Accountant
- Personal Financial Specialist
- Financial Planning Association Member
- University of Florida, BSBA