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Stocks Are Not Heirlooms

By Philip Bachman
pocket watch
Myra and I were chatting, and the topic of holding individual stocks for sentimental reasons came up. We have seen many cases where clients (or friends or family) own shares of a particular company – often large positions – either because they worked for the company, a family member worked for the company or acquired the shares, or they are otherwise emotionally attached to the company.

Is this an ok thing to do? Well, holding an individual stock solely based on one of these reasons is an example of making investment decisions based upon emotion not objectivity. In my view, holding a large portion of one’s assets in any single stock presents an unnecessary risk to their wealth, especially when the reason for holding it is sentimental.

For this article’s purpose, I am referring to shares of larger or publically-traded companies, not family businesses, which are often passed down to be run by the next generation. Awarded, gifted, or inherited shares of a publically-traded corporation are a blessing. But the question one must ask dispassionately is whether that company is poised to outperform its industry or indeed the overall stock market, meanwhile foregoing a more balanced portfolio.

To be clear, the intentions of folks who hold an individual company’s shares for emotional reasons are noble. They feel loyal to the company. They feel that they would be showing disrespect to the company or letting someone down in some way by selling the stock.

Although such feelings may be noble on one level, they are not wise from an investing standpoint. Despite someone’s love for a specific company, the investment risk of having a lot of their wealth in concentrated stock positions is too great compared to holding a more diversified portfolio. A more diversified portfolio lowers the unsystematic risk – company-specific risk of business disruptions, management failures, etc.

It is fine to hold a few shares of a company that you have a tie to as long as the position’s size is within reason. Let the investment portfolio be deliberately balanced. Let the grandfather clock be the heirloom.

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