Allocating a large proportion of your money and resources to one particular business can provide outsized positive gains. It can make you super wealthy.
There’s also a good chance of catastrophic outcomes. To leave you looking back at a lifestyle you wish you could maintain ‘if only’ your company had performed better.
Steve Jobs (Jobs) , Mark Zuckerberg (The Social Network) and Phil Knight (Shoe Dog) lives provide great stories. The stories of creating huge wealth from humble beginnings came from concentrating all their resources into one thing.
They’re the stories that grab our attention on social media, in the news, and in popular culture.
But, do those stories provide a good guide on how you should manage your investments?
Stats and Facts
Your priorities when making decisions on your money are based your personal objectives.
The most common objectives we see are based around financial security and freedom.
Make sure my family are going to be okay
Stop relying on an earned income to live my current lifestyle
Spend more time with my family, maybe a couple of holidays each year
Not often do we meet a client who wants to takeover the world and own a £1 billion yacht!
The truth is, when investing, concentration can lead to dire outcomes:
Only 39.4% of UK enterprises survived 5 years to 2023 (Statista)
More than half of 64,000 global common stocks had lower returns than cash from January 1990 to end 2020 (Long Term Shareholder Returns: Evidence from 64,000 stocks)
The top performing 2.4% of companies in the USA account for all the wealth created from 1990 to 2020
You’ll hear stories about the outliers – early adopters of Apple and Facebook make headlines.
Whereas the thousands of small business owners going bankrupt, employees seeing stagnant growth of their company shares, and investors who pick individual stocks and massively underperform the market, are silent.
Surely, we can just pick the next Apple?
If only it were that easy!
We believe investment markets are broadly efficient. This means the share price of all companies broadly reflects all available information. There are thousands of traders who make the price of each company listed on the stock market. For every buyer, there’s a seller. This creates a broadly fair price for each asset.
Evidence tells us that outguessing the market is incredibly difficult and most investors who opt for this method, underperform market returns.
Summary
Putting all your eggs in one basket is a very high risk investment strategy. It can lead to wildly good and bad outcomes.
For our clients, any money that your family is relying on to meet future expenditure will be invested in a highly diversified, low cost investment strategy.
Get in touch to start your investing journey today.
Risk warnings
Investments carry risks. the value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.