Blind spots exist in all realms of our lives. But in the world of finance, a blind spot can have costly implications.
Take Sarah, for example, a hypothetical IT executive. Given the nature of her career, she feels confident about investing in the tech sector. She takes special interest in each new startup, and feels she understands the industry and what it takes to come out on top in it. She believes in a tech-forward future. Due to all of this, Sarah’s portfolio is overly weighted in tech stocks. Placing all your eggs in one proverbial basket is not prudent, according to financial advisors. Sarah has a blind spot for sectors she’s unfamiliar with. Diversifying Sarah’s portfolio would provide financial protection in case of a downturn in the tech sector.
Similarly, let’s imagine James. James is a loyal, long-term employee of a publicly traded company. James holds a significant portion of his investments in his company’s stock. Given that James believes in the company’s mission, its potential, and works hard there, this may seem like a good idea on the surface. However, if James’ company faces a single hurdle, the majority of his investment portfolio becomes endangered. His blind spot is the deep-seated belief that his company stock is the right choice when diversification likely makes more sense.
We just described two scenarios with different reasons behind a financial blind spot: passion for a sector; and loyalty to a company. Managing your money blind spots can be difficult, but here are a few steps we suggest:
- Diversify your portfolio: Diversification prevents an oversaturation of investments, which can lead to risks for your portfolio if one sector or stock does poorly. Even if you feel passionate about a certain company or sector, it’s best not to put all your eggs in one basket.
- Regularly review your investments: Markets and sectors regularly evolve. While that investment might have made sense a few years ago, maybe it doesn’t anymore. Regularly reviewing and adjusting your portfolio ensures financial security.
- Invest pragmatically: Having emotional attachments to your company or the sector you work in is natural, but investment decisions should be made based on sound financial principles, not emotional inclinations.
- Seek the advice of a professional: Life can be busy, so it’s understandable if you’re unable to regularly keep an eye on your investments and manage them yourself. Financial professionals can be diligent by providing an objective view of your investments and handling matters for you.
- Educate yourself: Try to remain educated on the markets, emerging trends, and investment strategies. Staying informed can help you recognize your own blind spots and adjust your portfolio to reflect that.
Information provided by Valorem Financial and written in collaboration with Oechsli, a non-affiliate of Cetera Advisor Networks, LLC and CWM, LLC.
The individuals and situations here are hypothetical only, and do not represent the actual performance of any particular investments or strategy. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
A diversified portfolio does not assure a profit or protect against loss in a declining market.