"While Ramsey was quick to congratulate Michelle on her success, he also warned her that her strategy probably wouldn't work in the long run. The reason? Of the 20 stocks she had chosen, the majority of her strong gains came from four companies alone. This means that at this point, the bulk of Michelle's portfolio is in four stocks. That's not diverse enough, Ramsey warned."
"While those specific stocks may have done very well these past few years, who's to say that they'll continue to outperform? Ramsey's concern is that if those specific stocks plummet, Michelle could see her gains wiped out. That's why he recommended that she make changes to her portfolio by diversifying. "It would scare me if I woke up and half of my fortune was in four stocks," said Ramsey. "Because as those four companies go, so goes my fortune.""
Michelle invested a $270,000 life insurance payout in 2022 and grew it to $1.1 million over three years by selecting strong stocks. Twenty stocks were chosen, but most gains came from four companies, leaving the portfolio heavily concentrated. Heavy concentration creates vulnerability because sharp declines in those few companies could erase a large portion of the gains. Diversifying holdings spreads risk across more companies and industries, reducing exposure to company- or industry-specific downturns. Rebalancing and spreading investments can help protect gains and make long-term investment outcomes more sustainable.
Read at 24/7 Wall St.
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