I recently heard from a reader who mentioned that his wife had over 2,700 shares of AT&T stock sitting in an individual retirement account (IRA), and was seeking my input on whether such a heavy concentration in one stock was wise (this constituted almost the entirety of the IRA assets, in addition to a plain old bond index fund).
I posed the same question to him to rely on to his spouse that I pose to everyone wondering about proper portfolio risk management, “If something super weird happened and this stock went bankrupt, could you deal with it? Would it wreck your life? Would it set back your standard of living substantially?” If your answer is, “Yeah, it would cause me a whole lot of harm”, then there is no reason why you should stay super concentrated. You can reduce the risk substantially by dividing that money into Coca-Cola, Procter & Gamble, Johnson & Johnson, Disney, Nestle, Exxon Mobil, Chevron, PepsiCo, Colgate-Palmolive, McDonald’s, and Wells Fargo. The only sacrifice would be a reduction in income, but the diversification acquired by such a maneuver would be substantial.