Diversification is one of the most fundamental principles of investing. You probably already know a bit about it, primarily if you’ve heard the saying, “Don’t put all your eggs in one basket.”

Diversification refers to an investment strategy incorporating different investment types—not just stocks in different companies but different types of assets, geographic regions, sectors, etc. The key is that a diversified portfolio incorporates investments with varying levels of volatility and risk, so not all investments move in the same direction at the same time or speed.

Diversification allows investors to strategically balance the risk of investing with the opportunity to achieve suitable returns. Yet, for some tech employees, diversification can be a challenge. Let’s look at the risks associated with becoming overconcentrated in tech stocks and what investors can do to build a more diversified portfolio.

The Risks of Over-concentrating in Tech Stocks

Many technology companies offer equity compensation through employee stock options, restricted stock units, or other forms of non-cash compensation. Over time, as those options are vested, employees’ portfolios may become over-concentrated in their employer’s stock.

In a perfect world, your company grows exponentially over the coming years, goes public, becomes a household name, and enters the stratosphere of the “Magnificent  7.” Being 100% invested in that stock would make you a fortunate and wealthy investor.

But as all tech employees know, that trajectory is relatively rare. Tech is a risky sector, and significant risk comes with the opportunity for great reward. So, while you can hope for your company to make it big, you still need to plan for the possibility of a loss.

Rather than let your equity compensation define your portfolio, it’s essential to consider your stock options as part of a well-diversified asset allocation strategy. 

Approaches to Diversifying Your Investments

You are fortunate to have built up unexpected wealth – either through your work and stock options, inheritance, or another windfall. Diversification is a tool you can use to help reduce your overall risk and protect that wealth while still allowing it room to grow and serve you for many years to come. Your portfolio should reflect your unique long-term goals, values, and risk appetite. No “one-size-fits-all” approach will work for everyone. 

For example, a portfolio consisting of 60% stocks and 40% bonds is the “standard” asset allocation—but as a tech employee, we’ll likely want to tweak these numbers (especially if you plan on entering a work-optional lifestyle early). However, tech employees and mid-career professionals often get stuck regarding diversification. They receive stock awards and wind up inadvertently with all of their eggs in one basket – putting them at greater risk of losing their portfolio value. 

How to Think About Investing

Even though investing can seem overwhelmingly complex, I like to keep things as simple as possible. Here are a few key ideas I focus on with my financial planning clients when it comes to building a diversified portfolio:

  • Long-Term Focus: Investing is a marathon, not a sprint. Smart investors prioritize long-term gains over quick riches.
  • Simplicity in Strategy: Keep investing straightforward and aligned with your life goals. Automation and diversification are key.
  • Stay Invested: Markets deliver returns over time, so it’s crucial to invest early and consistently, despite market fluctuations.
  • Global Diversification: Diversifying across markets and regions mitigates risk and maximizes opportunities for growth.
  • Past Performance Caveat: Past performance doesn’t guarantee future success, emphasizing the importance of a well-diversified portfolio.
  • Consider Return Drivers: Structure your investments around factors like market segments, company size, relative prices, and profitability.
  • Focus on Controllable Factors: Manage emotions, ignore market noise, and concentrate on factors within your control, such as savings and spending habits.

Investments: What Comprises Your Diversified Portfolio

As you think about ways to diversify your portfolio, here are some standard investment options we can discuss in more detail. 

When you think of investing, it’s likely these traditional investments come to mind:

  • Company stock: Individual stock in publicly held companies.
  • Exchange-traded fund (ETF) & Mutual Funds: ETFs and Mutual Funds are often similar. They’re both funds with a pool of investments designed to track an index (like the S&P 500). They may pool together capital from multiple investors to buy various securities to create a diversified portfolio. However, how they are traded in the market is a bit different and, because of that, ETFs are sometimes preferred for taxable accounts (like a brokerage account), whereas Mutual Funds may be preferred for tax-deferred accounts (like your 401k). 
  • Bond: A loan to investors that provides a fixed interest return over a predetermined period.

The truth is that a diversified portfolio consists of a range of all of these things, and they fit together like pieces of a puzzle. As a tech professional, you may find that your portfolio is more heavily weighted one way or another – especially if you have an over-concentration in company stock. Working with an advisor can help you to create a diverse portfolio, safeguard against investment risk, and build a strategy that moves you toward your unique long-term goals.

Let’s Build a Diversified Portfolio Together

Along with incorporating a diverse set of investments, your portfolio should be made and regularly readjusted to support your goals, needs, and risk tolerance. We understand the temptation to pursue riskier investments, especially since you’re immersed in startups and innovation.

But that’s why working with a financial advisor (who understands your unique needs and challenges) is so critical. They can serve as an unbiased sounding board and guide to keep you focused on what matters most—your financial well-being and future goals. They can help you review investment opportunities using a keen eye and data-driven approach instead of relying on gut reactions or listening to the crowd. Your advisor can also help you address potential emotional biases, such as FOMO (the fear of missing out), which you may feel when not participating in certain tech gains (“If only I invested in Amazon in 2000!”). 

At Brightview, we specialize in helping high-earning tech employees make the most of their unique circumstances by helping them strategically incorporate equity compensation and other benefits into their greater financial plan. If you’d like to learn more about how we can help you build and maintain a well-diversified portfolio, don’t hesitate to reach out today.

After a successful career in high-tech, Sheila McGinn, CFP® followed her passion and became a fee-only Financial Planner, where she helps clients navigate complex financial decisions and reach their financial goals.

Disclaimer: This content is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. For advice specific to your situation, consult a financial planner, accountant, and/or legal counsel. Reproduction of this material is prohibited without written permission from Brightview Financial Solutions, LLC, and all rights are reserved.