Don't Buy What You Know

Just look at what happened to Harley-Davidson (HDI Quote) recently. People just love the company's fat, loud motorcycles, but the expensive stock has reflected that adoration for years. Just last week, the company reported a 27% jump in quarterly profits and beat analysts' estimates. But Harley didn't raise its production estimates for the year, which some analysts and investors were expecting. The stock fell more than 12% in two days.

It only takes a little bit of bad news to knock a pricey stock to its knees. Remember that if you're thinking about buying Krispy Kreme(KKD Quote). Yes, its donuts are luscious creations, but everyone already knows that. And the stock shows it. It's about twice as expensive as the broad market. And that's after the stock's 9% drop on Friday.

By focusing too much on buying what you know, you could also wind up with a portfolio that's heavily weighted to just one industry -- say retailing -- or one filled with trendy brands that can quickly lose their luster.

You might not have the necessary exposure in your everyday life to deliver a diversified portfolio. Outside of your job, you probably encounter retailer after retailer -- whether you're buying diapers, books, toys, clothes, furniture or electronics.

Your portfolio could turn into a collection of cyclical companies, which produce products that people can postpone buying, like cars, top-shelf liquor or expensive handbags.

I'm not allowed to own individual stocks as an employee of TheStreet.com. But if I went out and bought a handful of stocks based on my own life, I would wind up with a bunch of high-end apparel companies and a deeply troubled bank stock.