Thinking about going all-in on a stock? Here’s why that might not be such a good idea

There are known knowns, known unknowns, and unknown unknowns in investing, which means putting all your eggs in one basket is a bad move.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You’ve worked hard, kept your cost of living low, saved a good percentage of your salary, and now you want to make your money work for you. If you’re a regular reader of The Motley Fool, you’ll know the benefits of investing in stocks over holding cash: much higher average rates of return and protection against inflation. 

However, there’s a caveat. Higher rates of return tend to come with higher volatility. That means the tendency for prices to fluctuate, and one thing that’s undeniably true of stocks compared to bonds or cash is that their prices tend to fluctuate a lot more. Of course, this is what makes stock investing so potentially lucrative: the possibility of buying something for less than it’s worth. 

Be careful even if you are sure you are right

Due diligence and research are obviously crucial to the process of selecting a good stock for your portfolio. You should never buy a stock without careful examination of all its financial records, and a sober assessment of all the possible things that could happen in its sector and market. But say that you’ve done all of that, and you’ve fallen completely in love with a company. Should you go all in on it? 

Putting all of your eggs into one basket might not be the best idea if you’re someone who gets nervous at the idea of your retirement savings fluctuating. But even if you have nerves of steel, you should think twice about deploying all of your capital in one go. To slightly paraphrase Seth Klarman, a well-known value investor: “Investing requires both arrogance and humility.” You have to be sure enough that you — the buyer — are right and that the seller is wrong, but at the same time, you need to have the humility to recognise that there are limits to even the most thorough research. 

To paraphrase another scholar of the human condition, former US Secretary of Defence Donald Rumsfeld: “There are known knowns, there are known unknowns, and there are unknown unknowns.” Although Rumsfeld was ridiculed for the awkward language of this actually-much-longer speech, I think that investors can learn a lot by adopting this view of the world. 

The biggest risks you face as an investor are not the ‘known unknowns’ that you can anticipate, it’s the ‘unknown unknowns’ that you can’t. In late 2015, who could have foreseen either Brexit or a Donald Trump presidency? 

Diversification is  key

This is the real reason why good investors diversify their portfolios — not because they don’t have confidence in their analysis, but because they understand the practical limits of human knowledge. By buying stocks in a wide range of sectors and geographies, and potentially even adding other asset classes, you can insulate yourself from the volatility that will inevitably come from living in a complex world. If one stock tanks, you don’t lose your entire investment. And besides, there are a lot of high-quality stocks out there, so why limit yourself to just one?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »