One-Stock Retirement vs. Diversification

Diversification, Investing Strategies, Retirement
one stock retirement: person holding a golden egg

One-stock retirement. Those three words can stop you in your tracks, right? Is it a scam? A gimmick? Is it just click-bait? Well, not exactly. 

Over the years, several financial advisors floated this idea and once in a while it gets some traction. 

The concept suggests that investing modestly in just one stock could be the ticket to a lucrative retirement. After all, if you had invested even modestly in Apple (NASDAQ:APPL) in 1996 and held on to every share, you’d be quite happy today, right? The same is true of wildly successful stocks like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). The three of these stocks combined have increased exponentially.

In this article, we’ll examine if one-stock retirement is possible, and then help you analyze whether one-stock retirement is really a good idea for your long-term investment strategy.

Is One-Stock Retirement Possible?

The wealthiest men and women in American today essentially made themselves billionaires largely by owning a single stock. 

It’s true. Jeff Bezos didn’t amass his wealth with a diversified investment portfolio but by concentrating his investing capital in one stock he believed would succeed. Of course, that was Amazon. 

Bill Gates and Steve Jobs did the same with Microsoft (NASDAQ:MSFT) and Apple, respectively. 

How to Pick That One Stock

one stock retirement: compass pointing at the right decision

Of course, that one stock needs to be one of the best stocks out there. 

The issuing company would have to be a leader in cutting-edge technology — like Google (NASDAQ:GOOGL) or Tesla (NASDAQ:TSLA) — and breakthrough products that have global appeal. And its profit margins would have to be protected by patents, trademarks, and branding. 

A unique business model would contractually guarantee sales and profitability. The chosen stock would be among the best dividend stocks, and positive news from Wall Street would be forthcoming to help the stock price gain upward momentum.

Sounds like a blue-chip company, right? 

But here’s the catch: The one characteristic that the stock must have is that it has not yet been widely discovered and the stock price is low enough so investors can buy a significant number of shares.

Is One-Stock Retirement Planning Right for You?

Your mission as an investor should be to gather the best investment opportunities and strategies, analyze them, and decide if you can benefit from them or not. So to answer this question, it’s important to consider the elephant in the room here — the concept of diversification.

What About Diversification?

Investing guru Warren Buffett once famously said, “Diversification is a protection against ignorance.” You see, Buffett was referring to investors who “know what they’re doing.” Diversification only works if you understand the basics of investing.

So if you know as much as the Oracle of Omaha who owns diversified holding company Berkshire Hathaway (NYSE:BRK.A), then diversification will all but ensure investing success. 

But if you’re reading this article, you’d probably like a bit of guidance when it comes to securing a stable retirement for yourself and future generational wealth for your family. 

Diversification is a core investment strategy that spreads your investments out among different asset classes in order to minimize your exposure to any one type of investment. This way, you mitigate the volatility of your retirement portfolio over time.

How diversified you want to be will depend on several factors, including how long you have until retirement and your risk tolerance. Retirees currently tapping into their retirement portfolio will certainly want to minimize risk since there is no time to recoup losses. Meanwhile, investors in their 20s or 30s can tolerate more risk since their time horizon is longer. 

And while diversification in no way ensures a positive outcome for your retirement portfolio, it can help minimize risk and volatility in your retirement account and reduce the number of times you lose sleep because of ups and downs in the stock market. 

Diversifying and Rebalancing With Mutual Funds

A truly diversified portfolio rebalances systematically to maintain the desired degree of diversification and is more likely to decrease your exposure to market risk and protect overall  long-term gains. 

Budget constraints of the average individual investor prevents them from investing in enough financial assets to attain true diversification. 

However, mutual funds can help accomplish this goal and overcome the budgetary obstacles since they are managed by professional fund managers and structured to invest in a diversified portfolio of securities.

Can Diversification and a Single-Stock Retirement Plan Coexist?

Owning 10 stocks is technically more diversified than owning just one. However, there is a breakeven point where adding more stocks just for the sake of having more won’t necessarily benefit your retirement portfolio. 

The idea behind single-stock retirement isn’t an all or nothing commitment. So pairing the tenets of that strategy with a healthy dose of diversification is certainly possible.

Because diversification involves allocating investments into several types of financial instruments and across various industries and maturities, you can still achieve some degree of diversification using some of the basic principles that underlie the one-stock retirement idea. 

The ultimate goal of both approaches is to maximize returns and minimize risk. 

Diversification can take many forms. 

Other than for highly sophisticated investors, diversification is often recommended by financial advisors to some extent. Why? Because diversification ensures you’re investing in different areas that will respond differently to the same event.

Hybrid Approach: Diversified Among Industries

For example, if you have a retirement savings portfolio that only contains health care stocks, and share prices drop following bad news for the industry, your portfolio will be devastated without other counterbalancing investments to offset that drop.

If you employed the one-stock retirement concept and only chose one health care stock, but you very carefully selected the right health care stock using all well-supported criteria, you might be OK. More important in this situation is that your portfolio is diversified in other unrelated industries like real estate perhaps. This will help minimize exposure for your portfolio. 

Hybrid Approach: Diversified Among Asset Classes

Different assets, like stocks and bonds, will react differently to an adverse event. 

When the stock market or interest rates experience a swing, stocks and bonds tend to move in opposite directions. Even if you haven’t purchased many stocks or bonds, just being diversified in different asset classes will help offset negative impacts to your portfolio. 

Hybrid Approach: Incorporate Long-Term Dividend Investing

Unless the one stock is a dividend stock, you see no real money in your account until you close the trades. That’s the issue with doing long-term investing in stocks that don’t pay dividends — you lock away your money.

But long-term dividend investing is different. Every time you receive a dividend payout, you can choose to reinvest those funds or take them out and use them just like income.

Building a Retirement Portfolio That’s Right for You

old couple talking while sitting on a couch

Whether you decide to give the strategies from the one-stock retirement methodology a try or you decide to stay diversified, choosing the right investments is always important. 

You’re taking the right action by educating yourself before choosing those investments by reading this article. To learn more about high-yield dividend stocks that could provide a strong foundation for your retirement portfolio, subscribe to Investors Alley’s “Dividend Hunter” newsletter.

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