They say invest in what you know.

I think you should do the opposite.

I often talk to entrepreneurs or others who work in startups who invest their hard-earned money in individual stocks in the same field they work in. For example, e-commerce founders investing in Shopify or B2B SaaS founders investing in Salesforce.

What’s the reason? I think it’s partly because they are most familiar with those companies, having worked in the field, and partly because they feel (correctly) they have more information about working with those companies as a customer or partner.

What’s wrong with doing this? A lot. First, there’s reams and reams of evidence that picking individual stocks to beat the market consistently is effectively impossible unless your name is Warren Buffet (and even he hasn’t done it in a decade).

But second, if you are going to pick stocks, you should buy stocks that are inversely correlated or at least uncorrelated with your career. The intuition is this: your job is usually your main source of income and if you work in a startup, often you own equity in your company as well. You want your portfolio to hedge your implicit position in your job’s field, not double down in it.

We saw this play out last year. If you were an e-commerce founder, your company likely struggled vs. 2021 and if you also bought Shopify stock your portfolio was down 75%.

What does this mean in practice? Look, it might be theoretically rational to buy a complicated financial instrument to effectively short public stocks that are correlated with your company’s success or tilt your portfolio towards “value” stocks (dividend producing, lower growth) which can truly hedge out your exposure to growth. But in reality I and most people I’ve talked to about this find it good enough to buy low cost index funds that provide broad exposure to the public markets. At least then you don’t have all of your eggs in one correlated basket.

So that’s the reason you shouldn’t invest in what you know. This might be fairly controversial so let me know what you think in the comments!

*To state the obvious I am not an investment advisor so the above does not constitute investment advice!