The conversation usually goes something like this:

Me: I see you have all of your money in your employer’s stock. Does that concern you?

Him: No, not really, it’s done extremely well the past 20 years.

Me: And therefore you feel it is logical to assume the next 20 years will be like the last twenty?

Him: Yes, I believe so.

Me: Okay…let’s assume you’re right. What will that mean?

Him: I’ll be rich.

Me: Now, let’s assume for a second that you’re wrong and it drops in value by 50%. What will that mean?

Him: I’ll be broke.

Me: Have you ever been wrong before?

I have this discussion with people almost every month. I call it the Adam Talk. I admire loyalty a great deal, but when it comes to our money, it can override logic, and in the end, be quite destructive. I’ve seen entire net worths almost evaporate as a single company stock plummets from $65 a share to $8 over a span of 5 years. Of course, I hear often how it “it won’t happen to my company. We’re different.” Or, “that stock has been in my family a very long time. To diversify would be disloyal to my parents.” In truth, that stock doesn’t know you from Adam. But we’d like to believe it does.

The future of every company is vulnerable. Titans like GE, GM, and even P&G have experience moments of considerable downward volatility When we limit our holdings to just one or a handful of companies, we are arrogantly stating by our actions that we have identified the greatest company in the greatest industry on earth. Do we honestly believe that? And while you may believe that you know this company inside and out, never underestimate the influence of what you don’t know…like the future.

Good financial decisions are made on time tested principles. Even if the company stock doubles in value, having 100% of ones’ money in it is still a bad idea. It is akin to someone betting their entire fortune on a single spin of the roulette wheel. Even if he wins, it would still a horrible decision.

The financial media does a very poor job of explaining just what time tested principles are. They host countless programs with talking heads who tell us where they think the market, or a given stock, is headed. Of course, if any of these people knew the future, would they tell us? How valuable would that information be?

The time tested principles are the by-product of 60 years of academic research, most of it awarded with the Nobel Prize. Boring and simple concepts like owning 12,000 stocks not just one, re-balancing regularly, and refusing to the time the market place the odds in your favor. You can learn more about such concepts in books like A Random Walk Down Wall Street by Burton Malkiel, The Four Pillars of Investing by William Bernstein, and Main Street Money by Mark Matson