Sitting on That Concentrated Stock Position?

Sitting on that concentrated stock position?

Here at Sustainvest, we occasionally come across clients who are sitting on a large holding of a stock.  Simply stated, a concentrated stock position is if you hold more than 10% of your investment portfolio in one stock.  And this means stock, like Apple or Google or Zynga (remember that old gaming company!) not mutual funds like a Vanguard or Fidelity fund.  Having 10% or more in a fund in some cases is totally OK.  Below are five reasons why you may be holding onto that chunk of stock:

  • Inherited a large holding
  • Exercised options to buy your company’s stock
  • Sold a private business, or founded a company that subsequently went public
  • Benefit from price appreciation or repeated stock splits over the years
  • Accumulated restricted or common stock as part of your compensation

Living in the bay area, concentrated stocks are rather prevalent.  When I started working in sustainable investing back in the early 2003 (I was an advisor at a big Swiss bank called UBS) we would constantly run into employees of Sun Microsystems or Palm with large chunks of stock in their portfolios.  And then the dot.com bust occurred and well, the rest is history. This is why concentrated stock can be dicey.  Just looking at real estate prices in Marin or Mountain View, it’s clear that concentrated stock has helped some.  But, at the same time, tons of wealth has been lost that you can’t see.  Your one neighbor may drive that new Porsche, but the other neighbor doesn’t chat much about the Pets.com stock that broke the bank.  Speaking with your advisor on a strategy of dollar cost averaging out of the position could alleviate some of that volatility.  And at the same time, you retain stock in the company.

A diversified portfolio is designed to meet the risk profile and goals of clients.  If one wants to retain risk and take the chance of higher returns, then concentrated stock may be for them. On the flip side, if one looks weekly at their account balance and worries, than it may not be for them.  When we run financial plans, clients can see hypotheticals of what could happen to their porfolios if a concentrated position was to drop significantly.

As a portfolio manager for a sustainable investing firm during the 2008 financial crisis, I saw firsthand how allocations in cash, real estate, commodities like gold and value based stocks really helped offset a market that was down 38%.  We sat in the office and watched as Merrill Lynch almost folded (they are now Bank of America). Some clients who worked for pharmaceutical or tech companies held RSUs or restricted stock units which means they are “restricted” as to when they can sell them.  Watching your BioMarin stock go from $40 a share to $10 and unable to do anything may not sit well with some.

The question to ask yourself is, what if a company that I have a concentrated holding in was to drop 50%. How would I handle that emotionally?  Speaking with an advisor may help you answer that question.

About Dale Wannen