If You Already Own These Household-Name Stocks, Here’s the Risk You Might Be Missing
Written by
Chris Adam
Edited by
Zuri Anderson
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Big-name stocks like Apple, Microsoft, Nvidia, and Google typically dominate the headlines. But owning these familiar, household-name stocks can quietly increase concentration risk and sector overlap.
Still, there are ways to reduce your risks and better protect your money. Here’s what some financial experts told GOBankingRates about the importance of diversification and the potential risks with owning well-known, brand-name stocks.
Concentration Risk
If you only own a few names but you’re not actively managing these positions, you can and probably will be in for a rude awakening, according to Marcus Sturdivant Sr., managing member of The ABC Squared.
“First, we have the concentration risk of having most of our funds in one or a few positions,” Sturdivant said. “You look like a world-class investor when the stocks move up, but you can run around like your hair on fire if the movement is downward, and with the stock market, these moves can be swift ones.”
Sturdivant said you don’t want all of your portfolio to be correlated, or all to have the same theme.
“Everything should not be AI, chips, oil or whatever sector you may invest in,” he added. “We live in a world of dynamic information movement, and a company that is on the top of Everest today can be in purgatory from one post. Right or wrong, Main Street needs to adjust.”
Another Risk To Consider
Concentration risk isn’t the only concern. Kevin Estes, certified financial planner (CFP) and founder of Scaled Finance, said owning household-name stocks and wanting to invest in the big names is something he sees often with client portfolios.
“The brands we know are typically large-cap stocks,” Estes said. “Owning them can tilt a portfolio larger than the target.”
Ways To Combat the Risks
According to Brandon Gregg, CFP and advisor with BBK Wealth Management, one way to combat these risks is to buy an exchange-traded fund (ETF) or a mutual fund, which are essentially baskets of stocks.Â
“There’s risk to this, as well,” Gregg said. “Popular funds will most likely hold these individual assets as well, adding to your concentration. It’s important for any investor to really dive deep into what a company is doing and do their research. True diversification comes with in-depth research.”
Gregg said an investor wants to know how geopolitical risks, inflation, interest rates, and current events will affect the stocks they are researching. He said they want to make sure they are mixing asset classes, styles (growth, value, blend, etc.) and even geographical locations. All of these factors can help alleviate direct correlation and provide stronger diversification in a portfolio.
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