Stocks July 2, 2015

    You may have received stock options as a bonus, bought discounted shares through an employee stock purchase plan, or invested in company stock through your 401(k) plan. That's fine, up to a point. However, if your employer stock allocation grows to a level that unbalances your total asset allocation—more than 10%, for instance—you may be exposing your portfolio to more risk than you realize.

    Why? To begin with, it's always risky to concentrate your portfolio in one stock or even one equity sector. All companies, no matter how strong, can be affected by unique circumstances, such as strikes, lawsuits, natural disasters or simply poor business decisions. Good companies can be pulled down along with the rest of their sector during market downturns; recall the information technology sector collapse in 2000-2002, or the pressure on financials during the 2008-2009 credit crisis.

    Diversification is even more important when you are counting on the same company for investment return as well as a regular paycheck. If your employer hits a bump, you could be laid off and lose portfolio value at the same time. Worse, the company could fail and take a substantial portion of your retirement savings with it. Even relatively stable sectors—health care or energy, for instance—give you significant "human capital" exposure to that sector. Allowing your portfolio to become focused on the same sector increases your risk even more.

    Another good rule of thumb is to ask, "Would I invest in this stock if I had the same amount of money in cash?" If the answer is no, consider selling some holdings and investing the money in low-cost, diversified solutions instead.

    How Schwab Intelligent Portfolios® Can Help

    Schwab Intelligent Portfolios can help you diversify your holdings by investing in a portfolio of well-diversified exchange-traded funds (ETFs) and automatically rebalancing as needed. That way, you won't have to spend time monitoring and correcting your portfolio allocation to reflect your chosen risk level.

    Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.


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