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First Person: Your Stocks Don’t Know You Own Them

by pop tug

“I love that stock.” I wish I had a dollar for every time someone made that proclamation to me as a financial advisor.

‘Loving a stock’ is irrational. Plain and simple, it makes no sense. Why? This may come to a surprise to some, but stocks don’t know you own them.

I am sure many are scoffing at the ridiculousness at the proposition of the love affair people have with stocks, however, think of your own past. Have you ever bought the kids or grandkids Disney securities? Sports fans are forever proclaiming their bonds helped build a stadium or they have a partial ownership of a team that issues some sort of publicly available security.

Are these rational investment decisions or are they based on the experience or the emotions?

Perhaps I shouldn’t be surprised at the emotional connection people find themselves when they invest. After all, investing is typically driven by two emotions, greed and fear – greed for more profit and the fear of losing money.

I learned this lesson in a harsh way in the late -90’s with Pets.com. Despite warnings from a portfolio manager that the business model made little sense, I anxiously awaited the public offering of IPET. I was captivated by the marketing scheme – the adorable sock puppet that proclaimed, “Pets.com…because pets can’t drive.” I thought, along with millions of others, it was pure brilliance.

However, as history taught us, my portfolio manager friend was correct. Pets.com was out of business by the end of 2000.

What happened? My emotions got carried away. I ‘loved’ the sock puppet and ignored the fundamentals. Sure, I did some research and looked at sales trends but in the end I lamented over ignoring the basic business model’s flaws. Did it really make sense to buy a bag of dog food online for $8 with added shipping costs of $2 when you could get the same bag of dog food at the grocery store for $9 anyway? That’s oversimplifying the problems of Pets.com, however, it suffices as an example.

For years financial planners have been heavy handed in reducing the allocation retirees have of their former employer’s stock position. All too often these retirees break into a tirade. They proceed to explain to the planner about how the stock is misunderstood. That it is or has been a great stock for years. It’s an irrational argument.

Remember: you don’t owe the stock loyalty just like the stock doesn’t owe you its loyalty.

If you find yourself in a position of being over-allocated in a holding and are struggling to divest for tax or other reasons seek the help of a financial planner who specializes in this area. There are many wonderful strategies where options can be successfully utilized to protect a shareholder while helping them regain balance in a portfolio. Anyone with greater than 10 percent of their portfolio in a single holding must seriously consider reallocation.

Don’t fall in love with a stock. I promise, it doesn’t love you back.

sources: cnet.com

Robert Watkins is former investment professional and partner. His career spanned 25 years as a financial services and consulting advocate. Robert lives with his family in Glen Mills, Pa., and is a frequent contributor to Yahoo! News and Finance.

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