Do You Hold Too Much of One Brand Stock? Why It Could Hurt Your Net Worth

Investing in a company you believe in can be rewarding, but putting too much of your portfolio into a single brand’s stock could put your financial future at risk. Market downturns, corporate scandals or industry shifts can quickly erode your wealth if you’re overexposed to just one company.

Contents

Why You Might Hold Too Much Stock Why Diversification Is Important Stocks Face Multiple Risks Keep Your Brand Stock Allocations to This Amount Consider Taxes Let Go of Get Rich Quick Thinking

For You: How To Get a 10% Return on Investment (ROI): 10 Proven Ways

Read Next: 4 Low-Risk Ways To Build Your Savings in 2025

Diversification is key to protecting your investments and long-term net worth — here’s why holding too much of one stock could be a costly mistake.

Trending Now: Suze Orman’s Secret to a Wealthy Retirement–Have You Made This Money Move?

Why You Might Hold Too Much Stock

To begin, it’s helpful to understand when and why you might find yourself holding too much of one brand stock, according to Clay Cooper, wealth management advisor at Northwestern Mutual.

“Typically, they’re employed by the company and so they’re getting some sort of stock options through work, and they’ve worked there for a long time and the company’s performed or they kind of hit a home run,” he said. He pointed to companies like Tesla or Nvidia, where people got stock as much as 10 or 20 years ago.

“So, when you have a large, concentrated position, there tends to be a lot of emotion behind that position because it’s done well for you and so there’s a good feeling; or you work there and obviously you’re rooting for your company to do well.”

Consider This: I’m a Financial Advisor: 4 Investing Rules My Millionaire Clients Never Break

Why Diversification Is Important

For those who didn’t earn stock through employment, it’s important to make sure any investment portfolio is well diversified, Cooper said. “There’s a famous quote — ‘If it can make you rich, it can also make you poor.’”

As an example, he pointed out that while many big brand name stocks that seemed like safe bets years ago are now no longer contenders. “The market we know is constantly innovating and rewarding those companies that are coming up with new ideas. So, if you think about some of those brand names like Sears or Toys or Pan Am or Kodak or Blackberry or Lehman Brothers… hindsight’s proven them not to be a sure bet.”

If your portfolio is already well diversified, then you might be able to “be a little bit more concentrated” in one stock that feels like it’s performing very well.

Stocks Face Multiple Risks

The problem is that even the best-known brands are not immune to market volatility and numerous kinds of risks.

“It’s not just if the business doesn’t perform, but there’s governmental risks, there’s regulatory risks, there’s geographical risk,” warned Cooper. “Maybe your CEO becomes unpopular. There’s just a lot of different risks out there that are hard to factor into any investment thesis.”

Moreover, even the top 10 highest-performing brand stocks today, which include companies like Tesla, Google, Nvidia, Microsoft and so on. “Zero of them were in the top 10 in 1990, one of them was in 2000 and only three of them were in 2010,” he added. “So, innovation is very disruptive.”

Keep Your Brand Stock Allocations to This Amount

If you want to go by a rule of thumb, Cooper suggested never investing more than 5% to 10% of your portfolio in any single brand stock.

To help his clients think about this clearly, he often asks them to consider if they were to turn their stock into pure cash, how much would that be, and would they reinvest that cash back into the same stock?

Say you had $1 million cash value. “Most of the time, not all the time, but the answer is not all million, it might be, well, I’d put another 50 or a hundred thousand into it and then I would diversify the rest of the portfolio. So most people understand and actually with using logic are going to come up with a reasonable solution, but sometimes they feel stuck in that position that they’re in because of emotion.”

Consider Taxes

Another important consideration is taxes, Cooper said. “A big, big mistake I see people make is they let the tax tail wag the investment dog. So they’re making tax decisions on investment decisions.”

He shared a case of clients who didn’t want to sell their stocks in two big publicly traded companies because they didn’t want to pay capital gains taxes on it.

Cooper continued, “Hindsight is 20/20. Both of those companies are down about 50% from their all-time highs, and the capital gains would’ve been a lot cheaper than what the market costs them in terms of losses.”

Let Go of Get Rich Quick Thinking

It’s important to remember that investing is a process for the long haul, Cooper said, “Diversification is not a strategy to make you rich quickly.”

While you can get lucky with owning a lot of an individual brand stock, he pointed out that “diversification is really about creating generational wealth and making sure you’re bringing financial stability to the table. That’s certainly not as fun at a cocktail party to talk about how you have a diversified portfolio as it is to talk about the couple winners that you pick.”

While it’s ideal to consult with a financial advisor around these issues, at the minimum do the research to make sure you’re diversifying your portfolio.

More From GOBankingRates