Dave Ramsey says investing strategy that turned $270K into $1 million is “unsustainable”

One of the best ways to grow your net worth is to invest in assets whose value can rise over time. And many people like to turn to the stock market to achieve that goal.

During a recent episode of The Ramsey Show, a caller named Michelle shared her investing story. And while it’s an impressive one, Ramsey was quick to call her strategy “unsustainable.”

Where one investor may have gone wrong — despite sold results

Michelle invested $270,000 in 2022 that she received as a life insurance payout. She chose a group of strong stocks that exploded over the next three years. As a result, she was able to grow her $270,000 into a very impressive $1.1 million.

While Ramsey was quick to congratulate Michelle on her success, he also warned her that her strategy probably wouldn’t work in the long run. The reason?

Of the 20 stocks she had chosen, the majority of her strong gains came from four companies alone. This means that at this point, the bulk of Michelle’s portfolio is in four stocks. That’s not diverse enough, Ramsey warned.

While those specific stocks may have done very well these past few years, who’s to say that they’ll continue to outperform? Ramsey’s concern is that if those specific stocks plummet, Michelle could see her gains wiped out. That’s why he recommended that she make changes to her portfolio by diversifying.

“It would scare me if I woke up and half of my fortune was in four stocks,” said Ramsey. “Because as those four companies go, so goes my fortune.”

By diversifying, Michelle can spread out her risk across a larger number of companies. That way, if the stocks that did well for her suddenly drop in value, she won’t necessarily lose out on all of her gains.

How to diversify your portfolio

If you’re investing for your future, it’s important to protect yourself against not just stock market downturns, but industry- and company-specific declines. And diversification is a great way to achieve that goal.

Start by making sure your portfolio consists of different asset classes. You could put a large chunk of your money into the stock market if you’re years away from retirement and that’s what you’re investing for. However, it’s also a good idea to branch out into other assets that may include bonds, real estate, and even commodities like gold.

It’s also important to have some money in plain old cash. You never know when you might need to take money out of your portfolio, and cash can’t lose value the way stocks can.

Then, within the stock portion of your portfolio, make sure you’re not too heavily concentrated in a handful of companies like Michelle was. To avoid this, you could load up on a bunch of different sector-specific ETFs — for example, energy ETFs, tech ETFs, and more.

Another good option is to put some money into an S&P 500 ETF or a total stock market ETF. This gives you built-in diversification without having to do a lot of work.

It’s okay to hold individual stocks in your portfolio, too. Just make sure to spread them out across different industries, and to keep tabs on your portfolio over time.

If you see that a few specific stocks have produced large gains, do some rebalancing so you don’t have too much money tied up in the same few stocks. That’s a dangerous situation that, as Ramsey said, is not sustainable in the long run.