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Concentrated Equities Risk

Many investors today own individual common stock that represent a large percentage of their overall portfolio, hence concentrated in a single position, known as a concentrated stock or equity positions.

Putting all your eggs in one basket – called “overweighting” – is not considered to be the best idea by most financial experts because the larger the concentration, the larger the risk and the tax burden.

This also includes privately held or publicly traded concentrated equities, executive stock options and/or buyouts, IPOs, 401(k) contributions, inheritances, family businesses, professional corporations and the like. 

 

Good thing or bad thing?

Employees, for example, routinely purchase shares at a discount from their company to invest in their loyalty, their company’s success, and future earnings potential. Over time, and without proper management, the shares can “take over” the portfolio. 

However, despite taking on premeditated additional risk by owning too much of one stock, the concept isn’t all bad if, and only if, you and your financial advisor agree on the diversification, financial planning and estate planning motives.

 

Professional financial advice is essential

It is doubtful that Arthur Levinson, for example, the largest individual shareholder of Apple stock (AAPL) with 1.13 million shares, as of May 2018, hasn’t obtained financial advice regarding his shares in the world’s first company to reach $1 trillion in value. 

Contrast that with GE, once the world’s most valuable company. Employees holding too much company stock in their retirement plans got stung. As Reuters reported, more than one-third of the GE 401(k) plan assets were held in the company’s own shares in 2016. When its stock started falling – 80 percent from 2000 – the company was removed from the Dow Jones Industrial Average. 

And let us not forget about Enron, who also made history from its collapse.

 

Follow the numbers. They won’t lie

Many company employees also invest in professionally managed mutual funds or single stocks in industry sectors other than their own. The unofficial rule of thumb is to avoid being invested in any one sector by 25 percent, and no more than 10 or 15 percent when investing in employer stock. 

With diversification as one of the main drivers of creating a healthy portfolio, spreading out your holdings to include multiple stocks in multiple industry sectors seems prudent. 

So in an effort to diversify while deferring capital gains, advisors routinely encourage their concentrated equity clients toward several commonly used options, one including hedging, but also toward making charitable gifts in an effort to give back and help others.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Investment Advisory Team
Hefren-Tillotson

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