Let’s say you have a dozen eggs and a variety of baskets…
Okay, you see where we’re going with this. Diversification can, to mix farmyard metaphors, save your bacon. Investors who put a big chunk of their money into a single stock exhibit a fragrant mix of hubris and amnesia. Stocks of individual companies—even big, seemingly unsinkable ones—can and do go to zero. Goodbye, Enron! Sayonara, Washington Mutual!
The US stock market as a whole is far more resilient: despite plenty of terrifying plunges, it hasn’t gone out of business once in centuries.
Plenty of investors, however, aren’t getting the message. The average SigFig user holds 15% of their portfolio in a single stock. One in four users holds more than 23% of their portfolio in a single stock. That’s a big pile of unnecessary risk.
These investors may have a semi-good reason to hold a big chunk of stock—namely, that they work for the company whose stock they’re holding, are participating in an employee stock discount program, and are not allowed to sell the stock yet.
That’s not a great reason, since employer stock is the most dangerous stock you can own: your salary is already tied to your employer’s fortunes; why throw your savings into the mix, too? Yet, as long as you’re unloading the employer stock as quickly as you reasonably can, it makes sense to participate.
But what about the 15% of users who have more than 50% of their portfolio in just two stocks? Perhaps these investors have gotten lucky, picking hot stocks that have now elbowed aside less exciting parts of the portfolio. Or they’ve worked at both companies whose stock they own and haven’t rebalanced yet.
One caveat to all this: we can’t be sure that these users are syncing their entire portfolios with SigFig. Perhaps we can only see the jagged tip of a more diversified iceberg.
But any portfolio with a giant investment in one or two stocks could be improved by trading in some or all of them for a diversified index fund or ETF — or another boring investment less likely to blow a hole in your savings.