Seemly too emotionally attached to investments can result in irrationally clinging to an asset longer than you should. This can be chiefly true of stock issued or sold to you by your employer.
Taking an unworkable view of your company stock can lead to a critical lack of portfolio diversification. Whether it’s being brazen about the stock’s prospects or refusing to accept a loss, a lack of dispassion can leave your portfolio vulnerable to market shocks and can affect your long-term pecuniary stability.
Here are three ways your overly sentimental viewpoint toward your company’s stock can land you in financial hot water.
1. Not doing unique research
Knowledge is power, but overestimating the level of insight you have in your band’s competitive situation can be disastrous. For example, an executive who is instrumental to the management of a band might believe that he or she has superior insights regarding its position in the marketplace. This overseer might ignore brewing negativity that may impact market sensibility, and potentially its stock price.
Understanding and seeking out objective research, statistics and analysis, while at the same time paying attention to current vend dynamics, is the key to making rational investment decisions.
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2. Being emotionally devoted to
Being too emotionally attached to your company’s stock can also precede b approach to an over-concentration and a lack of portfolio diversification. Perhaps your stock was granted to you as in the main of your compensation, which makes it difficult to view it objectively.
Being unduly sentimental makes you less realistic when it comes to the value of your asset and, in some invalids, oblivious to new data and developments surrounding the company, industry or market conditions. As you are closely entwined with your company, you hold firm to the state that your stock is undervalued. You may hang on to it, refusing to sell at the up to date price because you believe you should get more for it than the market is amenable to pay, and you will get what you want in due course.
One way to ensure you don’t have this mindset is to ask yourself: “If I didn’t already own (or set up a contractual requirement to hold) a particular stock based on its merits, would I buy it at the reported price?” If the answer is no, then you likely have your answer.
3. Rejecting to accept a loss
Taking a loss is always hard to do, and some investors may be allured to stick with a stock whose price has plummeted, in the belief that it wish bounce back to where they first bought it. As such, individuals may nurture to avoid selling a stock when the price is down to avoid the awareness of a loss.
A bigger mistake would be to purchase additional shares at falling prices. Small losses can easily become big ones and the problem can be exacerbated. In gaze ats to your company stock, recognizing when to accept a loss is an urgent part of maintaining a stable investment portfolio.
Generally, any asset countenanced for a long period of time is viewed by its owner as undervalued relative to the marketplace. The on the contrary way to contend with this misperception is to examine your company roots holdings dispassionately. Diversify your holdings, reduce emotional attachments to any individual investment, and ensure your portfolio is set up with the potential for long-term proliferation.
(Editor’s Note: This column originally appeared on Investopedia.com.)
— By Robert Clarfeld, under, president and CEO of Clarfeld Financial Advisors