Diversifying Concentrated Holdings
July 30, 2019
Many dedicated employees, especially in Silicon Valley, eventually gain significant exposure to their own company’s stock by regularly participating in employee stock purchase plans (ESPP) or by being awarded various forms of stock options over the years. While focusing on building a career, they often inadvertently amass a sizable portion of their overall personal wealth in a single stock holding. If this applies to you, and regardless of the source, you might be feeling increasingly challenged by the implications of such concentration and how to unwind your current position.
As we enter the eleventh year of this now longest economic cycle in U.S. history, it is probably as important as ever to embrace a well-reasoned plan to diversify a concentrated stock holding of your employer, especially if you might also be facing what is commonly referred to as unsystematic risk, which relates to industry- or company-specific issues. History has many examples of surprise outcomes that have caused employees to lose much, if not all, of their hard-earned life savings by not adequately addressing their overexposure to company stock. Think of Enron, Lehman Brothers, and Kodak to name a few, and to a lesser extent firms like GE and Volkswagen. And it doesn’t have to be all or nothing. Keep some of the company stock, if you want, but consider surrounding it with complementary types of investments to maintain market exposure and reduce volatility associated with single stock exposure.
Start by asking yourself a few basic questions. What is the ultimate use for this investment? Are your goals relatively shorter term, such as funding a child’s education or purchasing a home? Or longer term, such as funding your retirement needs? What would be the impact to these goals should the stock fail to perform? Moreover, if it is part of your annual compensation and you are dependent on this source of income to fund your general lifestyle, are you willing to risk a potential decline—perhaps permanently—in the stock price?
Ideally, every holding within your overall asset allocation should be carefully considered to fully reflect your risk tolerance. In particular, a concentrated stock position should work within your investment profile. At whatever stage of life you are in, you should consider whether you need to invest for growth or income. If income is what you need, the stock should be assessed for its dividend-paying capabilities both now and in the future. Should it not to be able to pay sufficient income, there is an opportunity to sell and reinvest in other assets such as fixed income instruments or a basket of stocks that generate a reliable source of income. A concentrated position should always be judged like any other piece of your allocation and assessed for its relative attractiveness versus the universe of thousands of available stocks.
Many people also suffer from what is characterized as regret aversion. They experience remorse if, after selling some shares, the stock continues to rise in price. But obviously, there is no guarantee that your company will enjoy continued or uninterrupted success and hence there may be opportunity costs to staying in the single stock. Besides, chances are, if you are still employed at the company, you will continue to accumulate additional shares through compensation benefits. You can remove the emotional component behind decision-making by automating the divesting process and selling a fixed amount of shares in set intervals.
Once you answer the above types of basic personal questions, work with your Wealth Manager and tax preparer to address the range of additional considerations from tax ramifications to charitable intent. Always remember, if the bulk of your financial well-being is linked to a single company that is also your employer, the risks are that much higher. Should your employer face challenges, you may find yourself without any paycheck or health insurance, and possibly hard-hit retirement savings and severely depleted portfolio values. Conversely, well-diversified portfolios comprised of multiple asset classes grounded in disciplined and strategic management are more likely to provide consistent returns over time with less inherent risk than single stock holdings.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
