January 15, 2016
Corporate executives know there are many financial benefits that often come with the job, including stock options, profit sharing and other-equity based compensation. These tactics can help build considerable long-term wealth, but they can also expose your investment portfolio to unnecessary risk. Holding too much of a single stock – even if that stock is in your own company – creates an unbalanced portfolio, which means a sudden market shift or business crisis could decimate its value.
“Having a large position of any one stock in your portfolio is risky,” says Robert Haworth, CFA, Vice President and Senior Investment Strategist for U.S. Bank Wealth Management. “No one knows the future.”
“A surprisingly high percentage of even large, blue chip companies frequently experience large stock price declines,” adds Bill Merz, CFA, Vice President of Derivatives and Structured Products for The Private Client Reserve. He notes that having an overly concentrated portfolio can be counterproductive to your investment goals.
A Cambridge Associates report on Concentrated Stock Portfolios shows there’s a 41-50 percent chance that a portfolio consisting of a single stock will fall 25 percent or more in a given five-year period. That’s compared with only a 13 percent probability for a diversified portfolio. “As a fiduciary, it is our duty to help clients reduce that level of uncertainty when appropriate,” Merz says.
How to diversify prudently
Fortunately, Haworth says, there are many investment tools that can help investors mitigate