Plan, Invest, Live…#6 Too much of one stock? A case study…

A client recently came to me with their investments, and unfortunately too much of it was in one stock. Yikes! I asked and was granted permission to share the story so that others could learn from this. Obviously, I’ll leave out the names for privacy. There are two lessons we’ll get to from this situation.

Here’s a quick definition that you should get to know. The phrase is “concentrated position”, and it has nothing to do with juice!

When someone has a stock that dominates the portfolio risk and return, we call this a “concentrated position” in the financial planning industry. This means the portfolio is not much of a portfolio. The “portfolio” is really going to behave just like that one stock. If the price goes up, that’s great, you’ll likely benefit from that move in the stock price. However, the downside is the major concern since you will also be tied to the downside move of that stock unless you use a “stop” or “stop-limit” order on this stock. Some folks refer that that as a “stop-loss” order. You can set these up to protect yourself on the downside and if you are interested in learning more about them we can talk offline about it. You can also contact your investment account provider to help you learn more about the pros and cons of using them.

Remember Blockbuster Video? I know you do! Personally, I remember walking around their stores hunting for a “New Release” that wasn’t already gone. It was usually sad shopping for a plan B movie. “Hey, it looks like Footloose from 1984 is not rented yet, let’s get that again.” (I confess I did double check…but I had the year right.) Blockbuster got busted. This is a company that pretty much vaporized in a few months when Redbox and Netflix came on the scene. Technology and  financial markets can move really fast and you don’t want to be holding a lot of a bad company when they get wiped off the map. Even a “good” company can turn quickly in the wrong direction.

Lesson 1: Don’t let one company (no matter how good you “feel” they are) dominate your portfolio as the downside risk outweighs the upside potential.

Lesson 2: Don’t forget Lesson 1.

At Visionary Planning & Investment, LLC we build portfolios for clients, or manage existing ones. Usually, we are going to help someone who has a large concentrated position move to a less risky stance by reducing the exposure they have to one stock and divide that across various companies and company categories. I say “usually” because one of the things we’ll need to consider is the tax consequences (if any) of this move. If the stock is held in a taxable account (think non-IRA/non-401(k), etc…) there is the potential of a large tax hit that we’ll want to consider before we make that move. The timing of that move could be important because there could be a big tax rate difference if you have held that stock for over a year or less than a year. I don’t want to get too deep into that here, but it is something we need to consider when the time comes.

If a client does not have a stated preference, I prefer mutual funds or exchange-traded-funds (ETFs), which are similar, as an inexpensive way to diversify. It allows us to spread our risk over lots of companies.

Investing involves risk. Absolutely. There is risk in the financial markets. The market does not always go up in a straight line. It is bumpy and unpredictable. You are not guaranteed to make any money. In all my years in the financial industry I haven’t someone who could predict the timing and the direction of the markets well. Planning is key. Discipline is important. Sleeping well is good too, and the folks we just helped are doing more of that these days.

Let’s get a PLAN, INVEST, and then go LIVE by impacting the world in some positive way.

Call 720-210-4990 or Contact me here to get started.