Invest in what you know.
Have you heard this saying before?
I bet it was the first piece of investing advice that you ever received.
Unfortunately, it’s probably the worst investing advice that you’ve received.
I don’t mean to be a Debbie – Downer, but as your financial advisor, I want you to succeed.
Investing in what you know leads you in one direction – to overconcentration.
I’ve seen it 1000 times.
A computer engineer will invest in technology stocks like Facebook, Google, or Apple.
Someone living in Texas is most likely to purchase oil-related stocks
East Coast people tend to invest in Financials
Midwest people invest mostly in manufacturing
What is wrong with this?
First, when you invest in what you know, you overconcentrate. You may have 30% of your portfolio in Apple and 30% in google. Two companies control the future of your money! Do you want that?
In the tech crash in the late 90’s Cisco, which was a powerhouse (like apple now), lost 86% in the crash. If you had $100 in Cisco, you ended up with barely enough money for dinner at McDonald’s. Think about that. How would you feel if 60% of your portfolio dropped to almost zero in a year?
I bet you wouldn’t feel great about that. Yet, people do it all the time.
Just think about the people that lost their life savings to Enron…
To add insult to injury, people get hit with a double whammy if the sector they work in crashes.
Say, you work as a computer engineer, and you firmly believe in the future of technology. So, you invest in what you know. You buy a couple of popular tech stocks.
All of a sudden - the technology sector implodes. Now not only are your stocks going down, but you’re more likely to lose your job as well!
Scary!
This scenario happened to millions of people invested in tech during the 90’s. It also happened to millions of people in financials during the crash in 2008.
The better approach is investing in a diversified portfolio.
When I invest for my clients including you, I use a diversified portfolio. I invest your portfolio in THOUSANDS of different companies within dozens of different countries.
I want to protect you from any one asset class or company from affecting the success of your plan.
Before you “invest in what you know”, please contact me first.
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Copyright 2018 Odyssey Wealth Design. Odyssey Wealth Design provides financial planning and wealth management to clients in Orange County, Irvine, Newport Beach, and around the country.