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Investing a substantial amount of capital into a single stock can be a high-stakes gamble for business investors. The decision to concentrate resources in one company comes with inherent risks but can also lead to substantial rewards.
Here, Forbes Finance Council experts discuss whether such a strategy should be pursued and explore some of the smartest approaches to mitigate risks and maximize returns when making large capital investments in single stocks. From thorough research and due diligence to implementing risk management techniques, these strategies can help investors navigate this potentially volatile terrain and make informed decisions that align with their risk tolerance and investment goals.
1. Determine The Risk Profile Of The Investor
Risk and reward go hand in hand. The higher the risk, the higher the reward. While putting everything in one basket is risky, it can also lead to outsized returns if the stock outperforms. The right diversification strategy should potentially depend on the risk profile of the investor. - Darshil Shah, Evercore Partners
2. Take A Weighted Portfolio Approach
Diversification will help to minimize systemic risks and total loss of investments. My recommendation is to evaluate the risk and return and put a larger percentage in the stock with the higher return. Spread the risk and return using a weighted portfolio approach. - Oluwatoyin Aralepo, Mastercard Foundation
3. Consider The Investor's Net Worth
It's always a good idea to consider diversifying one's investment and not being overly concentrated on one investment. How much of the investor's net worth does this "large investment" represent? That's a critical question to answer. If the investor is looking to hedge their investment, they might want to consider various options strategies and/or hedging with futures contracts. - Ehud Gersten, Perch Wealth
4. Invest In The Company's Future
There are justified, even strategic reasons to make a large allocation to a single company. We see this happen in strategic equity holdings as well as in (stressed) takeovers when a single investor buys a large stake in order to steer the path of the company. This is economically the smartest scenario, as the investor holds all company data and steers its future. - Lucia Waldner, CC Trust Group AG
5. Diversify Portfolios Rather Than Concentrating
Most investors should be diversified, and there is simply too much risk in putting a large amount of capital in any single stock. Even great companies go through difficult times. Most investors were not worried about the health of First Republic, even just a few months ago, but imagine how difficult that would have been if you allocated a large amount of capital behind that bet. - Roxana Maddahi, Steel Peak Wealth Management, LLC
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6. Contribute Money Over Time
While diversification is the standard rule in conservative investing, putting a large amount of capital into one stock or even an early-stage company should occur over time, in stages, as a company makes progress and proves its core value. This will help manage downside risk and take advantage of dollar-cost averaging. This approach with Apple and Microsoft decades ages would have been brilliant. - Eric Solis, MovoCash, Inc.
7. Invest In Different Types Of Assets
It's generally safer to diversify by investing in different types of assets that behave differently in different market conditions. By investing in assets with less correlation to each other, our portfolios may be insulated against a crash in any one asset class. Research shows that a relatively small number of stocks (about 30) will obtain most of the risk-reduction potential of diversification. - Gerry Frigon, Taylor Frigon Capital Management LLC
8. Do Very Thorough Research First
Concentrated investing in a single stock can be a great way to build wealth but it comes with unique risks compared with a broadly diversified portfolio. One does not have to look very far back in history to see high-flying stocks that were all the rage have come crashing back to earth. If you're going to play the individual stock game, you really need to go deep into the companies you own. - Joshua Strange, Good Life Financial Advisors of NOVA
9. Put Money In The Company You're Active In
Concentrating a portfolio from a diversified bucket into a single stock is taking on increased risk, hoping for increased returns, above what the market offers. If one is to put a large amount of capital into a single company, that should be into the company that you are operationally active in—the best investment you can make is in yourself where you have control to increase your own net worth. - Karl Rogers, Elkstone Private
10. Buy The S&P 500
The way to be successful in this approach is to buy the S&P 500. In an interview with Warren Buffet, he proves that this approach is safer than betting on individual stocks. As a supporting argument, Buffet points out that in 1903 there were more than 2,000 car companies, and nearly all of them failed. Bet the S&P and you will be a long-term winner. - Yaakov Goder, Millendeal
11. Receive Stock As A Byproduct
If the investor works at the company or has control over the company, then substantial investments may be warranted. Concentration is the key to getting wealthy. Diversification is the key to staying wealthy. I typically don’t recommend this type of concentrated investment unless someone starts the business or needs to fund it heavily in an operational role and gets stock as the byproduct. - Gil Baumgarten, Segment Wealth Management
12. Purchase Small Shares First
It is risky, but when done correctly, concentrating on one investment is a great way to put your money to work. Just be certain that the firm you invest in has a promising future. But do research about their staff, investors, customers, competitors, goods and services. When you're satisfied with the result, purchase small shares first before adding more over time. This will ensure that your money grows steadily over time. - Neil Anders, Trusted Rate, Inc.
13. Consider The Personal Risk
From the perspective of a business owner, one is often compelled to invest significant sums of personal capital into company operations and growth. Returns can be substantial, but the personal risk is greater. We recommend clients diversify their business stock over time. Their income and career are positively correlated with the success of the business, their investment portfolio need not be. - Luke Andriuk, Saugatuck Financial
14. Make One-Stock Investments Short-Term
Many people get matching stock from their company and forget about the fact that their company stock makes up the majority of their portfolio. Should the stock make a sudden change such as we have seen recently in the banking industry, you might lose your job and your nest egg. Large amounts of capital into one stock should be a short-term, high-risk strategy and not your retirement strategy. - JD Morris, RHC 21 LLC (a SPE Fund) with family of Special Purpose Entities (SPE or SPV)
15. Incorporate A Stock Option Strategy
Unless the business investor has a share ownership requirement that mandates a certain level of investment, I would typically advise against placing a large amount of one's balance sheet in a single stock. If done, the investor should consider incorporating a stock option strategy that works alongside the concentrated investment to better manage the downside risk of the overall investment. - Brian Niksa, Capstone Financial Advisors, Inc.
16. Have An Exit Strategy
I seldom advise my clients to make moves like this as the risk is high. If you must, diversify your risk by investing across multiple companies and industries. Doing so may mitigate potential losses from any particular company or sector underperforming. Additionally, research the companies you are investing in thoroughly and have an exit strategy should the market turn against your investments. - Julio Gonzalez, Engineered Tax Services Inc.
17. Deeply Understand The Industry First
Mark Twain said: “Put all your eggs in one basket and watch the basket carefully.” This move is for people who really know an industry and its players, and have a lot of conviction about a new deal going through. They should consider macroeconomic trends, how much growth remains possible for the company and understand how a geopolitical event or new tech innovation could threaten everything. - Karim Nurani, Linqto
18. Set Up A Rule 10b5-1 Trading Plan
Owners of businesses generally will have a large percentage of their wealth tied up in the stock of their company, whether public or private. While risky, outside investors always like owners to have "skin in the game" and the more the better. It shows their conviction in the company. Owners can set up a Rule 10b5-1 trading plan for legally trimming shares when they need to sell for diversification. - Aviva Pinto, Wealthspire Advisors
19. Be Prepared To Lose Money
Diversification of risk is a fundamental tenet of any business investment strategy. Business investors who go all-in for a single stock take significant risks. If unsuccessful, the investor should be ready to lose significant capital. Risk versus reward is at the heart of that investment decision. - Gale Simons-Poole, BHG Financial
