Last week we were asked to address this topic for an article – we get our best ideas from clients. As the investment adage goes: you get rich through concentration, you stay rich through diversification. It holds a lot of truth. Knowing what to do and when is a question of matching risk with reward. Consider these concepts and questions if you currently hold a significant piece of your wealth in a single entity or are thinking of doing so.
Two tickets, please
Know the ups and downs and get ready to put you and your spouse on a wild ride. Indexes, like the S&P 500, don’t double in value, double again and drop 75% only to hit a new high 12 months later. Single stocks, especially tech stocks, do this regularly. That’s what makes a concentrated position so powerful in wealth creation, they can win, and win big.
So how much is too much?
If you tend to live below your means, you probably have sufficient room to swing for the fences on a handful of single stock bets. Investors with extra capital and high savings rates simply have enough extra money to take risks. If a big sell-off would put you in a pinch, a concentrated holding is not the answer.
A few questions to ask yourself
Most often, people tell us that money represents freedom of choice. Ask yourself, would a 50% drawdown in Stock “A” have a material effect on your quality of life? What would be the impact on your plans, tuition payments, mortgage payments or financing your child’s wedding? Hoping for the best isn’t a strategy. Beyond the obvious pain of loss of capital, how would a significant drawdown in your concentrated position disrupt your lifestyle? Have you built a lifestyle that is now larger and costs more than your current risk level can handle? We can help you answer these questions. Be aware of building castles on top of sand.
Slow and steady
Wealthy individuals became wealthy mostly due to a combination of two factors: saving more and spending less – see Make More or Spend Less?. However, there are third and fourth ways which are not often discussed but happen all the time: marriage and inheritance. Those of you who grew your wealth through slow and steady savings rates probably don’t have a problem with investment patience. For those of you who quickly gained wealth through big stock option payouts, large inheritances, or through marriage, money can seem plentiful and endless. Patience, or any lack thereof, is a crucial investment value.
The Apple effect
Investment FOMO (fear of missing out) is real! You probably know more than a dozen people who talk about buying Apple, Amazon, Facebook or even Bitcoin before it was worth what it is today. Don’t listen to it. They won’t ever tell you about the stocks that failed them and your imagination is likely to give those storytellers far more credit than they deserve.
The executive’s dilemma
Like it or not, economic, political or industry events can wipe out shareholder value regardless of a company’s ability to hit or exceed targets. Even executive officers who have direct control and oversight of their businesses have very limited control of their company’s stock price. If nothing more than an exercise in humility, take an inventory of your expenses and double check that a significant drawdown in your company’s stock, likely your largest holding, won’t wreck your lifestyle.
It all comes down to downside risk – how much can and should you withstand? Even if concentration has made you wealthy, it may be time to let diversification do its job and keep you wealthy. We can help you understand your risk level and consider your options.
Max Osbon – email@example.com
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.