Your Favorite Stock Might Be the Biggest Problem With Your Investments
09:18 Share

You know that feeling when someone shows up for you just when you need it most? That's what Uber is all about. Not just a ride or dinner at your door. It's how Uber helps you show up for the moments that matter. Because showing up can turn a tough day around or make a good one even better. Whatever it is, big or small, Uber is on the way. So you can be on yours. Uber, on our way.

Here's your Money Briefing for Tuesday, June 3rd. I'm Callum Borschers for The Wall Street Journal. We've all been warned against falling in love with a hot stock that can thrill you today and break your heart tomorrow. But it's just so tempting. Some people call this dance with the one that brung you. You stick with the person who makes you feel good on the dance floor.

And people do the same thing with stocks. The risks of over-committing to a single investment and the rare times when it actually makes sense. That's after the break with Wall Street Journal intelligent investor columnist Jason Zweig. Stay with us. ♪

This episode is brought to you by Amazon Prime. From streaming to shopping, Prime helps you get more out of your passions. So whether you're a fan of true crime or prefer a nail-biting novel from time to time, with services like Prime Video, Amazon Music, and fast, free delivery, Prime makes it easy to get more out of whatever you're into or getting into. Visit Amazon.com slash Prime to learn more.

Investors are feeling good again after tariffs rattled the stock market this spring. Some are feeling so good about certain high-performing companies that they're asking things like, is it a bad idea to have 85% of my portfolio in Nvidia? Should I own some other stocks besides Apple?

These are the sorts of questions filling the inbox of Wall Street Journal intelligent investor columnist Jason Zweig, and he joins us now to discuss. So how about it, Jason? Should these inquiring minds diversify their portfolios? They should, Cal. It's quite common for people to have over-concentrated portfolios. And of course, after many years of a bull market interrupted by just a couple of bumps along the way...

A lot of people are sitting on enormous gains. But diversifying investments isn't a universal best practice, is it? I mean, haven't Warren Buffett and other star investors made their fortunes by placing big bets instead of riding the wave of the broader market? Yeah, that's exactly correct. There's an old saying that fortunes are made by undiversifying, but they're kept diversified.

by diversifying. If you think about something like the Forbes 400 list of the richest people in America, most of them got rich by betting on a single company.

But there's enormous turnover on lists like that because the way you get rich is usually not the way you stay rich. And once you really make it big on a single stock, hanging on to it might or might not be the best idea. Is it also important to recognize that most of us are not Warren Buffett? One of the points that I made in this column is that there are two types of people who

who should concentrate their stock picks. And the first type is people like Warren Buffett or Charlie Munger, who have just extraordinary skills at picking stocks. The second type is what you might call a control person, a CEO or another extremely senior executive at a publicly traded company where

your decisions have influence over the outcome of the company's future. In either of those cases, it makes a lot of sense to concentrate your portfolio. But wow, is that a small number of people.

Sounds like a little self-awareness is important. Trouble is, people tend to overestimate their abilities, don't they? So how can we make realistic assessments of our investing know-how? You should start by looking at your investment performance over the longer term and ask yourself, am I actually as good at this as I feel I am? Or am I just on a lucky hot streak that maybe is driven by one particular stock like

It might be NVIDIA, for example. That sort of honest self-assessment is probably the single most important thing you can do as an investor to improve your long-term returns.

It's easy to understand how individual investors, especially inexperienced ones, can overload on Bitcoin or one super stock. Surely institutional investors run by the pros know better, right? No, they don't. This is not an individual investor problem. It's a human problem. Anyone who invests a lot of money in a single asset that does very well will feel the same pressure

to hang on to it. Some people call this dance with the one that brung you. You stick with the person who makes you feel good on the dance floor. And people do the same thing with stocks. We looked at some of the top private foundations in the United States, and we found that

About 10% of the foundations with at least $500 million in assets have at least 30% of their portfolio in a single stock. So that's quite common. A lot of these foundations are endowed with a grant of a single stock. And once they're endowed with it,

they tend to keep it, often almost indefinitely. And over time, what we see is on average, the foundations that diversify tend to perform better than the ones that don't. Is there a stock that was the NVIDIA of its day 10, 20 years ago that hasn't looked as good in the long run? We could talk about the Kresge Foundation that was initially endowed with stock in Kmart. And of course, Kmart once established

was the Walmart of its time and no longer exists. For quite a few years, that Kmart stock did very well for the Kresge Foundation, but in more recent decades, it shrank. And fortunately, the foundation diversified and

and that turned out to be a good decision. So how should investors view a moment like the one we're in when the market is rallying? I mean, mixing it up seems obvious when returns are down, but should people really take money out of a winning stock and spread it around? In some ways, it's the best time to do it. It can be tricky if you have embedded capital gains in the stock, but if you own it in a retirement account where you don't have to have

Quit while you're ahead, as the saying goes. Exactly.

That's WSJ Intelligent Investor columnist Jason Zweig. And that's it for Your Money Briefing. This episode was produced by Zobie Culkin with supervising producer Melanie Roy. I'm Callum Borschers for The Wall Street Journal. Thanks for listening.