Holding all your eggs in one basket

8th June 2011

This is despite this being a particularly high-risk strategy during turbulent times.

The research shows that a further one million of those with directly held shares have at least 90% of their holdings in the stock of a single company.  Over a third of investors with capital invested directly in company shares – not through a fund, unit trust or pension scheme – hold at least 50% of their shares in one stock. 

More than half of investors with directly held shares cite the desire to make future capital gains as the main reason for not diversifying their portfolio, says Schroders.  Almost a third of these investors were stung by falls in equity prices in recent years and are waiting for their shares to bounce back in value before they divest these stocks, as they do not want to record a loss on their investment, the research reveals.

Around  5% of investors with directly held stocks are keeping them for sentimental reasons, as they were a gift or were paid by their employer, while a further 5% are keeping the shares to gift to family members in the future.            

Robin Stoakley, managing director of Schroders UK Intermediary Business said: "Investing in a single company does leave one potentially exposed should that business run into difficulties.  In the last few years we have seen established businesses rapidly disintegrate, such as Bradford & Bingley and Northern Rock, leaving little or no value for investors.  A balanced investment portfolio sees investors spread their risk, while potentially generating strong returns."     

Over half of investors purchasing stock directly in a company did so because they believed the shares would increase in value and they would make a capital gain upon selling these shares. Almost a quarter of those with shares held directly in a company secured them as part of a Save As You Earn (SAYE) scheme, demonstrating the value of employers facilitating access for savers to the equity market.  A further 15% of those holding shares directly in an enterprise inherited or were gifted these shares.

Brian Dennehy from independent financial adviser (IFA) Dennehy Weller & Co, says: "We shouldn't be surprised as studies over many decades have shown that human beings are very poorly prepared to be good investors – this isn't an educational issue (though that doesn't help), but a psychological one. The 32% waiting for their shares to bounce illustrates a classic behavioural problem – the inability to take losses."

However, Danny Cox from IFA Hargreaves Lansdown adds: "The most common occurrence of people holding just one type of share are employees or former employees who acquire shares from Save As You Earn schemes or share options. For example I used to advise many retired Lloyds bank managers, some of whom might have 30,000 shares or more. They all recognised the need to diversify, however, most of the shares are acquired with healthy profits which meant large capital gains tax bills if they sold them.

"They would only realise sufficient shares to absorb their capital gains tax allowance each year. However, in the case of these ex-Lloyds employees, it highlights the problem of holding just one stock, the share price having fallen now from a peak of around £7.67 to today's price of around £0.47 (portfolio of 30,000 shares worth over £230,000 in 1999 to around £14,000 now). Sentimentality is also a factor, either as they were a former employee or perhaps they were inherited.

"Holding one share is a risky strategy – a balanced share portfolio should typically have between 25 and 30 different stocks. Investing in unit trusts is one of the easiest ways to diversify your investments, since each unit trust will invest in between 30 and 100 different shares, and the fund manager will make all the investment decisions for you."

 Darius McDermott, Managing Director, Chelsea Financial Services said: "Risk can never be entirely eliminated but it is possible to manage it by spreading one's investments. Through a unit trust investors can achieve broad exposure to shares representing good companies across a variety of industries and sectors. Other unit trusts allow access to bonds and a mix of other asset classes for even greater diversification.

"Investing in a unit trust managed by an experienced active fund manager with a good track record should also ensure that the portfolio is regularly re-balanced allowing the investor to take profits if certain stock valuations have risen sharply. Investors also get the benefits of greater economies of scale, such as reduced transaction costs and access to certain investments normally unavailable to individual investors."

Blogger Barry Ritholtz, writing in the Washington Post discusses how private investors can improve their assets, by asking the question "What should I learn to become a great investor?", his opinion is: "You don't need to have an MBA or doctorate in economics to be a good investor. Indeed, as the spectacular blow up at Long-Term Capital Management has taught us, these can be impediments to good investing.

Instead, you need to develop more general skills. Learn market history, understand crowd psychology, how to think critically, be able to do simple math and understand basic accounting. Do this, and you are on the path to becoming a much better investor."


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