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Putting Your Money Into A Single Stock? Three Rules For Curious Investors

Summary

While diversification is typically favored, there may be some curious about taking a concentrated investment position.

Putting all of your money into one stock or asset class has the potential to equal a substantial payout, but it could also damage your long-term financial health.

Let's discuss three considerations to keep in mind before making this transition, and why it's important to work in tandem with your financial advisor while doing so.

We’ve heard it said a million times that diversifying your portfolio is one of the wisest moves you can make as an investor. Splitting your assets between myriad stocks, bonds, funds and other entities can help ensure that as the market ebbs and flows, even if one property wanes, it won’t affect your entire savings. Still, there is often a push to invest in a single, well-performing stock as a way to recoup any major losses incurred over the years in a relatively quick timeframe.

While this move could mean a major payout if all goes according to plan, there are many things to consider before making the leap. Chiefly, one should speak to a financial advisor to determine the best route forward and precisely where to place their dollars. After that conversation has been held, here are three other things to keep in mind.

1. Consider how it will impact your short and long-term financial goals.

A major aspect of investing in the stock market is how your money will work for you now, to ensure you have adequate savings in the future. You don’t enter the stock market to make a quick buck. Rather, you’re thinking 10, 15 even 25 or more years down the road, when your earnings have had time to accrue and multiply. As such, making any sort of major adjustment to your investment strategy can have a direct impact on the money you’ve saved to date, and the amount you’re able to save moving forward.

If the stock that you’re considering suddenly crashed or went to zero, would it wipe out everything you’ve spent years working toward? Or, would you be able to bounce back relatively quickly? Besides the obvious financial setback, how could it also impact you or your family emotionally? Think long-term when deciding whether to move your assets into a single stock.

2. Set your limits and avow to stick to them.

If you do opt to take a concentrated position, you’ll need to do so with some set boundaries in mind. You’ll especially need to know at which target price ceiling you plan to cash out at, as well as a lower limit you’ll accept in the event the price drops. Making these calculations helps to ensure the process is strictly about numbers and that you aren’t leading with your emotions, which can lead to you making impulsive and irrational decisions in the heat of the moment.

Establish these parameters early on and stick to them as you monitor your stock’s performance. You shouldn’t stick with a poor-performing stock simply because you have a tie to it or your family has always invested in it. Rather, performance should be your number one indicator and if you know your upper and lower limits, you’ll be able to use those numbers as gauges.

3. Do your homework and ask your questions.

Most financial advisors will direct you away from putting all of your eggs in one basket, though there may be viable reasons to take this route. To this end, it’s important to speak to someone about your plans, receive their expert advice and use the points they give you as jumping blocks for your own research. For many, moving all of their money into one stock, or even into one overarching class of assets, can directly affect their retirement savings, traditionally in a negative manner. It can also impact other money you’ve saved, such as your business financing, home equity, children’s college funds, and more.

Before you make this move, it’s important that you’ve done plenty of research. If you have, and you still come to the conclusion that it’s the route you want to take, you’ll be best served by having the support of a trusted professional on your side.

Making the move to invest in a single stock can be a major turning point in your investment strategy, as well as your short and long-term financial outcomes. Regardless of your reason to pursue this decision, it’s not one that should be entered into lightly or quickly. Taking the time to research your options, analyze your emotions, and set your parameters at the onset can help ensure that your financial health soars, and doesn’t suffer, at this decision.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.