Concentrated Positions Can Pose Portfolio Risk

Investment Strategy

Concentrated Positions Can Pose Portfolio Risk

Concentrated positions may create wealth, but they may not protect it.

April 19, 2016

It is important for investors to understand that the very asset that helped create significant wealth may also pose the biggest risk to their future financial security. A concentrated equity position is defined as a substantial portion of an investor’s wealth (10% - 15%, or more in some cases) tied in one stock. These highly concentrated positons can result from employer stock and option incentives, long-term employment at a single company, a large inheritance, etc.

Holding a large, single-stock position creates significant risk and increases portfolio volatility, which can have a catastrophic effect to an investor’s future financial security.

Mitigating the Risks

Diversification can reduce a portfolio’s overall volatility. When an investor holds a variety of stocks and bonds, they transfer the risk from one stock to multiple sector and asset classes, which can mitigate portfolio volatility. When one stock goes down, another may go up, thereby reducing the impact that any one stock can have on your overall portfolio.

Investors may be reluctant to diversify their position due to negative tax implications, reliance on dividend income, emotional attachment and/or behavioral biases they have toward the stock. These issues have been known to immobilize investors and prevent them from taking the appropriate action to mitigate risk.

Working Toward Better Solutions

There are a variety of strategies that an investor can implement to manage the inherent risk of a concentrated position. These strategies are designed to be within the context of the overall portfolio and can provide viable solutions to meet investor’s short- and long-term financial goals.

Your financial advisor can address your questions and concerns surrounding a concentrated equity position and then discuss the merits and considerations of various solutions that match your investment objectives.

Diversification does not guarantee a profit nor protect against loss. Dividends are not guaranteed and may fluctuate.



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