What should you know?
Investing in only a single stock or a handful of random companies is extremely risky.
We often see this with new clients who receive share awards as part of their remuneration. They build up enormous holdings in a single company, which is usually the same company that pays their wages.
The image below shows the 500 companies in the S&P 500 today, proportioned by their respective size in the index and grouped by sector. On the other side, we zoom in on an average-sized company within the index:
Why should you care?
It doesn’t matter how successful a company has been, how much the stock price has grown, or how passionate you are about its future prospects, investing a large proportion of your wealth in a single company is extremely unwise.
You should never own so much of one stock that you can make a killing in it – or be killed by it!
The share price of a single company can change suddenly for a variety of reasons, and in extreme circumstances, a company can even collapse entirely.
Management decisions, changes in regulation, new technology, economic headwinds, or an unforeseen global pandemic can all rapidly change the future prospects of a business, for good or for bad.
Conversely, if you own a basket of thousands of the world’s greatest companies (aka the whole stock market) you know that all downturns are temporary and that the long-term trend will always be upwards.
