Investing a large amount of capital in a single stock can be risky, but with careful planning and strategic analysis, it can also yield significant returns.
Investors considering this option should thoroughly research the company's financial health, market position and growth potential—while also considering diversification within their portfolio to mitigate risk. If concentrating capital in a single stock seems too risky, diversifying investments across multiple assets or sectors is generally viewed as a safer alternative.
Below, Forbes Finance Council members share their perspectives on heavy investment in a single stock and provide strategies for making informed and balanced investment decisions.
1. Remember: Investing In A Single Stock Is Speculative
For most investors, investing a large amount into a single stock is more speculative than long-term focused. If you have 10 years or more until retirement, properly diversified equity ETFs may be prudent (provided you have the risk tolerance for cyclical market movements). If you have less than 10 years until retirement or are already in retirement, then more yield-based investments should be added. - Justin Stanfill, Cerrito & Stanfill Wealth Management
2. Diversify To Capture The Best Returns Over Time
Investing in stocks always involves risk. Even a small amount of capital in a single stock would not be considered "safe." It is best to diversify. Different asset classes provide the best returns annually. So, diversify into stocks, bonds, real estate and other industries (tech, financials and so on) and geographies (U.S., international and emerging markets) to capture the best returns over time. - Aviva Pinto, Wealthspire Advisors
3. Assess And Size Risk Appropriately
This should rarely be done outside of their own business. Investors must be absolutely diligent at assessing risk and sizing that risk appropriately. Concentrating their capital amplifies the possibility of both bad and good outcomes. - Mike Mess, Veracity Capital
4. Prioritize Protection First And Growth Second
Allocating large amounts of money into a single stock exposes investors to unnecessary levels of risk. There are a multitude of low-cost index funds and mutual funds that can still provide significant upside potential while remaining properly diversified. If you are investing close to or during retirement, prioritize protection first and growth second. - Sam Davis, Active Wealth Management
5. Consider Investing In Assets Like Gold Or Real Estate
Yes, an investor can put a large amount of capital into stocks concentrated with assets like gold or real estate. Gold has a long history of maintaining value, and real estate, especially in low property tax zones, tends to appreciate over time. By thoroughly researching these investments and managing risks, investors can enhance their portfolio's stability and growth potential. - Manoj Kumar Vandanapu, UBS
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6. Take A Smaller Position
Clients frequently ask me about taking a large allocation in a single position. The risks associated with a single business are abundant. The management team could leave or they could miss on earnings for the next four quarters. Why not take a smaller position and dollar-cost-average over time? That way, you could add to more than one sector and business, and do so at opportune times. - Gregory Clifford, The Clifford Group
7. Implement Robust Risk Management Strategies
Investing heavily in a single stock is risky. Investors can mitigate this by conducting thorough research, diversifying within the stock, closely monitoring performance and implementing robust risk management strategies. Alternatively, diversifying across multiple stocks or investment vehicles offers a more balanced approach to managing risk and achieving long-term financial goals. - Adesuwa Lilian Edokpolor, Seolahm Consulting Limited
8. Assess Your Industry And Company Insights First
For most investors, holding a large amount in a single stock is not advisable. Instead, diversifying investments into low-cost mutual funds or ETFs is typically more beneficial. These diversified investments can grow with the market over time. While experienced investors with unique industry or company insights might consider a concentrated position, this strategy is generally not recommended. - Richard Winston, Slalom
9. Consider ETFs To Concentrate On An Industry Or Company
Too many risks when investing in a single stock are out of an investor's control. If they like a specific industry or company, there are ways, such as ETFs, that allow you to still capitalize on the growth of a stock while minimizing the downside risk. In addition, frequently, sectors will all follow a similar growth pattern over time. - Jonathan Moisan, Advertise Purple
10. Only Consolidate Investments If The Loss Wouldn't Impact You Financially
If that stock collapses, and it does not impact your financial life in a real way, then it's a risk you can take. If its collapse would change your standard of living, then it's a hard no. - Patrick Dwyer, NewEdge Wealth
11. Diversify To Protect Your Portfolio And Credit
It's definitely risky, but it can be advantageous if done strategically. Diversify to protect your portfolio and credit. For business and personal credit, ensure stability by investing in different assets to balance potential losses and maintain financial health. - Antoine Sallis, THE GREAT AMERICAN CREDIT SECRET
12. Never Put All Your Eggs In One Basket
Never put all your eggs in one basket. The risks of single-stock investing generally far outweigh the potential rewards. Overweighting a specific stock is fine if it’s part of a diversified portfolio. That way, you will have exposure to the company but limit the exposure in order to limit the impact. The risk of loss is always felt more greatly than the euphoria of a win. - Sonya Thadhani Mughal, Bailard, Inc.
13. Balance Risk And Reward When Making Decisions
Investors would be prudent to balance risk and reward when making investment decisions. A time-tested means of accomplishing this is diversifying across asset classes, such as stocks, bonds and alternative investments. Individuals can now access alternative investment exposures in the form of ETFs and mutual funds as a key alternative to over-concentration in individual stocks. - Greg Bassuk, AXS Investments
14. Consider The Capital Relative To The Overall Financial Picture
It depends on what is considered large. More importantly, what does the large amount of capital represent as a percentage of their overall financial situation and asset allocation? If it will keep their single stock allocation to less than 5%, then I don't believe it's a bad idea. I wouldn't say it is safe or unsafe. Any investing always involves risk, making the word safe a bit subjective. - Bob Chitrathorn, Wealth Planning By Bob Chitrathorn of Simplified Wealth Management
15. Frequently Review The Investment
Investing in a single stock is risky because it exposes you to volatility and company-specific risks. It's safer to diversify your investments across several stocks to minimize potential losses. If you choose to invest in one stock, conduct thorough research, use stop-loss orders to manage risks and frequently review the investment to adapt to any changes in market conditions and company performance. - Magdy Hassan Fayed, Forex Gump SRL
16. Spread Capital To Manage Risk
Investing a large amount in a single stock is risky due to a lack of diversification. Smart investing involves spreading capital across multiple assets, sectors or geographies to manage risk. For those focused on one stock, consider gradually building a position using dollar-cost averaging and setting strict stop-loss orders to protect capital. - Gianluca Sidoti, The Wealth Company International FZCO
17. Invest Large Quantities Only After Thorough Research
Investors can consider placing 5 to 10% of their portfolio in a single stock if they have thoroughly researched the stock. Charlie Munger said, "By closely examining and comprehending these businesses, investors can make more informed decisions, resulting in a higher likelihood of achieving exceptional returns." I agree with Charlie Munger. - Ford Stokes, Active Wealth Management, Inc.
18. Consider Staggered Investments To Avoid Market Volatility
Investors may benefit from staggered investments rather than investing all of their money in a single stock. Investors are able to purchase shares at lower prices and experience less market volatility as a result of this technique, which involves investing a certain amount of money consistently. - Neil Anders, Trusted Rate, Inc.
19. Only Invest Large Amounts Of Capital In Your Own Business
There is only one stock in which an investor should put a large amount of capital—their own business—when one is actively involved in its long-term performance. This has been a key determinant in wealth creation for enterprising families and individuals. Over time, diversifying the holding into an investment portfolio under the guidance of an advisor becomes essential to maintaining that wealth. - Brian Lasher, CIG Capital Advisors
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
