managing concentrated
stock positions
Whether you receive equity as compensation, inherited a large position, or purchased a stock that soared in value, you now may find yourself with a concentrated holding that introduces unwelcome challenges.
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What is a Concentrated Position?
Holding a significant portion of your investment portfolio in one stock is known as a concentrated stock position. It's common for company founders, corporate executives, and board members who are compensated with company stock to end up with concentrated positions.
What are the risks?
Idiosyncratic Risk: investing too heavily in a single stock exposes you to company-specific risks that can be devastating to your portfolio.
Heightened Volatility: lack of diversification increases portfolio volatility and can result in larger, more severe drawdowns.
Underperformance: the majority of single-name stocks have historically underperformed their respective markets over the long run.
The Illusion of "Worsification"
Diversifying your portfolio might seem counterintuitive if you believe in the future prospects of your company. However, history has shown us that individual companies are more likely than not to underperform the market over the long run.
Single stocks vs. the market
Do Single Stocks Outperform Over the Long Run?
Consider This: since 1990, only a third of US stocks outperformed the market over a 5yr rolling period. This figure drops to 29% and 21% over 10yr and 20yr rolling periods, respectively.
Challenges with Diverisfying
Many investors understand the importance of diversification but find themselves hindered by various legal, regulatory, and even personal challenges. However, these roadblocks, while formidable, are not insurmountable.
EMOTIONAL ATTACHMENT
- Fear of missing out on future appreciation
- Loyalty to company
- Comfort level investing in what you know
TAX LIABILITY
- Often highly appreciated, low-basis stock
- Sale could result in a significant tax liability
- Most prefer to hold on to stock to defer liability
regulatory
- SEC rules and regulations
- Employer terms and restrictions
- 10b5-1 exemptions
How do we solve this problem for clients?
We believe in a personalized approach to investment diversification. By considering the unique aspects of your financial situation, including regulatory and legal implications and your specific wealth management objectives, we're able to design a diversification plan that aligns perfectly with your goals.
- Regulatory Insight: Our experienced team is here to help you with the complexities and numerous regulations surrounding concentrated stock positions within company plans.
- Customized Wealth Management: Your financial goals are unique. That’s why our diversification strategies are tailored specifically to meet your needs, helping you reach your objectives more effectively.
- Overcoming Personal Hesitations: Change can be challenging. We understand the psychological barriers that come with modifying your investment approach. Our team is here to support you, offering the encouragement and advice you need to make confident decisions.
- Informed Decision-Making: Knowledge is power, especially when it comes to investing. We provide you with comprehensive insights and data, empowering you to make informed choices about your portfolio.
Ready to start a conversation?
Schedule a free one-on-one consultation and learn how you can unlock the full potential of your equity.
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