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July 08, 2009

Business and Investing: Too Close to Comfort

Business and Investing: Too Close to Comfort

Steve Viuker

Freelance Writer, Business Insider

Summary

The expression "What you don't know can't hurt you” can be reversed at times for good investment advice. What you do know can hurt you even

The expression "What you don't know can't hurt you” can be reversed at times for good investment advice. What you do know can hurt you even more. Small business people, whose fortunes are so closely tied to one particular industry, must be wary their personal investments aren’t too closely aligned with their professional holdings.

“Often, we see investors who are overexposed in their own company stock and/or industry,” explained Judith Ward, senior financial planner at T. Rowe Price. “They tend to buy the stock for emotional reasons; loyalty to the company, industry, or familiarity with company names.”

Ward says that investment style can lead to a portfolio that vulnerable to a big hit because it’s too focused. “When we help investors create a plan, we give them a rule of thumb of no more 5% in any one company stock, including their own,” Ward says. “We also encourage investors who may want to make a sector bet to limit to 10% of their overall portfolio”

George Cambas has owned his own real estate firm in Brooklyn, N.Y for more than 30 years. He didn’t make the plunge into more real estate investing when the bubble was inflating. “I didn’t invest in a REIT and briefly thought about a partnership to buy some property in Baltimore. I didn’t do that either,” he said. “My major real estate investment is the house I purchased 35 years ago.” He also owns the building that contains his office and two rental apartments in Park Slope.

Cambas did invest in a mutual fund but pulled out in 2008 and moved some money into an annuity. He was lucky to be an early investor in an improving neighborhood so the single-family brownstone that cost him and his wife $35,000 is now worth $1 million.

For those wannabe bottom fishers looking to play real estate now, though, he has one warned. “See before you buy. I know a couple living in London who purchased a house; sight unseen in Buffalo. It turned out to be a vacant lot.”