VIDEO – Retirement Investing Pitfall #8 – Excessive Single Stock Risk

This video is going to touch on retirement investing pitfall #8 from my book, Plan Smart Retire Right. This is the risk of investing excessively in a single stock or company. Now every investor needs to decide how he or she wants to approach investing for retirement. And this is true, whether you pick investments yourself or hire an advisor to do it for you. However, investing in individual stocks involves certain risk.

Single stock risk is the risk that something occurs relative to a specific company, causing the individual stock to decline, regardless of the overall market or sector. Let me give you an example; if your portfolio consists of several stocks and one of them enters bankruptcy – losing 100 percent of its value – your overall portfolio is likely to be significantly impaired, even if the general market is performing well. Instead, purchasing an ETF which invests in the S&P 500 index for example, a catastrophic event affecting one of the companies within the index won’t have the same devastating effect. This is because each company only makes up a small part of the overall value of the index. So what does this teach us? While ETFs help address diversification among a variety of asset classes, they also typically eliminate the single stock risk associated with owning a few individual stocks.

So, why do investors sometimes fall into the trap of taking excessive company risk with their retirement money? Well, one of the most prominent reasons for this is what is referred to as the unbalanced loss effect. I will explain this effect in our next video. Let me ask you this; are you taking too much single stock risk? Do you know what effect this can have on your overall retirement plan? If you’d like a 2nd set of eyes on your portfolio, give us a call and we’d be happy to perform a complimentary risk analysis for you.