Man in tie, pondering a problem

Familiarity (Should) Breed Contempt

Here’s terrible investment advice, but I’ll bet you’ve heard it frequently.

Invest in companies whose products you like.

One study compared the returns of highly admired companies (as rated by Fortune Magazine) with much lower rated, less admired ones.

Measured over almost a 25-year period, the returns of the “spurned” companies were higher than those of the most admired ones.

There’s another problem with this advice.

If you overweight your portfolio in companies you know, you won’t be properly diversified.

There are thousands of public companies you’ve never heard of.  Many aren’t located in the U.S.

Diversification has been called “the only free lunch in finance”.

It permits you to reduce your risk, without sacrificing expected returns.

Enjoy the products you like.  But those companies should not factor into your investment decisions.

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