Becoming too emotionally attached to investments can result in irrationally clinging to an asset longer than you should. This can be especially true of stock issued or sold to you by your employer.
Taking an unrealistic view of your company stock can lead to a critical lack of portfolio diversification. Whether it's being overconfident about the stock's prospects or refusing to accept a loss, a lack of objectivity can leave your portfolio vulnerable to market shocks and can affect your long-term financial stability.
Here are three ways your overly sentimental attitude toward your company's stock can land you in financial hot water.
1. Not doing proper research
Knowledge is power, but overestimating the level of insight you have in your company's competitive situation can be disastrous. For example, an executive who is instrumental to the management of a company might believe that he or she has superior insights regarding its position in the marketplace. This executive might ignore brewing negativity that may impact market sentiment, and potentially its stock price.
Understanding and seeking out objective research, data and analysis, while at the same time paying attention to current market dynamics, is the key to making rational investment decisions.
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2. Being emotionally attached
Being too emotionally attached to your company's stock can also lead to an over-concentration and a lack of portfolio diversification. Perhaps your stock was granted to you as part of your compensation, which makes it difficult to view it objectively.
Being overly sentimental makes you less realistic when it comes to the value of your asset and, in some cases, oblivious to new data and developments surrounding the company, industry or market environment. As you are closely entwined with your company, you hold firm to the position that your stock is undervalued. You may hang on to it, refusing to sell at the current price because you believe you should get more for it than the market is willing to pay, and you will get what you want in due course.
One way to ensure you don't have this mindset is to ask yourself: "If I didn't already own (or have a contractual requirement to hold) a particular stock based on its merits, would I buy it at the current price?" If the answer is no, then you likely have your answer.