President and Sr. Financial Advisor
Affinity Wealth Management LLC
Do any of these stories have a familiar ring to you:
You inherited an out sized stock position in a large industrial conglomerate from a grandparent who’s since passed away. You’ve held on to the stock even as the company’s heydays are long past, because of the importance of the investment to your family.
You bought stock in a small software company in the early days of the tech revolution, and the strong growth you earned on your investment helped you pay for your children’s college and enjoy a comfortable retirement. But now that small start-up is an industry behemoth and isn’t growing as fast these days.
You worked for a great company for 30 years. They treated you well and rewarded your good performance with company stock. There may have been lean years when the company struggled and the stock price fell, but you’ve held on to your shares with the belief the company will always bounce back.
Don’t fret if any of these examples hit close to home. It’s not uncommon for individual investors to get emotionally attached to stocks or companies, especially when they’ve been a part of your portfolio for many years.
You can admire the way a company does business. You can stay loyal to an employer. But admiration and loyalty can often lead to concentrated stock positions. That’s when problems begin to occur.
You may be carrying around emotional baggage about a favorite or long-time investment. We see this problem quite frequently among clients we work with-they’ve owned a stock for many years and it’s done well for them, in some cases becoming their biggest holding or the largest component of their wealth.
But just because a stock performed well for decades in the past doesn’t mean it will perform well for decades in the future. There are plenty of examples of core portfolio stocks whose performance has either stagnated in recent years or are now shadows of their former blue-chip selves. (GE, GM and IBM come to mind.)
It’s one thing to own a favorite company in your stock portfolio, and quite another to get emotionally attached to your investment. What can you do when you find your portfolio over-weighted toward a company you like?
Own your emotional attachment-Recognizing the problem is the first step in solving it. Despite all the rational reasons you may have for owning a favorite stock, the decisions you make about it-whether to hold or sell your stake-will ultimately be influenced by your emotions. When you filter your emotional attachment, you can make a prudent decision with your investment.
View your investment in context with your overall plan-Ask yourself what purpose the stock investment is playing in your portfolio. How is it helping you meet your objectives or fulfill your lifestyle needs? If the price of your favorite stock falls by 30% or more, how will you feel or react? Even if you’ve build up a significant position in the stock over many years, it always make sense to do a risk/return assessment on owning the stock.
Recognize that things change-That vibrant young company you invested in 30 years ago? It probably looks like a much different company today. That stock that was great for your grandfather 50 years ago? It may not be so great for your future financial needs. That’s because the economy and the business environment today is so much different than in past decades.
Don’t hold on to a stock just because it’s been in your family for generations, passed down from parents to children. There are other and better ways to acknowledge the gifts your family has provided, ones that won’t pose a threat to your financial situation.
Have a process to manage the risk-You may have ridden a favorite investment company all the way up, but that doesn’t mean you can or should ride it all the way down too. It’s important to approach all of your holdings with discipline and operate with rules to sell on the upside and the downside.
For example, if you have out sized holdings in a single company, you could sell 10% of your position each time the stock price appreciates by 5%. That can help you keep your exposure within reasonable limits in your portfolio.
Know that you can always buy it back-Selling a stake in a favorite stock doesn’t mean losing it forever. It’s okay to sell a position to reduce your exposure to risk, then buy it back when the company’s fundamentals or technical position returns to more attractive levels.
As a case in point, consider a prospective client who approached us back in 1999 with a retirement portfolio valued at over $1.5 million. Two-thirds of that portfolio was invested in a single stock-a foundational tech company that was doing extremely well in the stock market boom of the early Internet years.
We recommended this investor begin to drawdown the concentrated investment, until it came to around 10% of his portfolio. We understood this was a drastic reduction in exposure, but a critical decision to make for his financial future. We also recommended sell triggers for this stock when it crossed certain performance gates.
This prospective client was gobsmacked by our recommendations. “Why would I do that?” he exclaimed. “This company has been around many years. It’s more like a savings account than a stock.”
You can imagine how this decision played out for this investor in the subsequent years. In the dot-com crash, the value of his concentrated position dropped by 95% and never recovered. Neither did his retirement plan.
Good companies don’t always make good stocks. Before investing in any business, it’s always important to assess how the stock fits in with your overall financial plan. And no matter how much you like the company or are attracted to the stock, you should always ditch the emotional baggage and focus on the practical and rational reasons for owning the stock in your portfolio.
Michael Sicuranza, CFP® & AEP®, is an *award-winning wealth advisor who is the President of Affinity Wealth Managment, LLC. He focuses on providing comprehensive wealth management solutions to medical professionals, small business owners, and affluent families in the Delaware Valley. Together with his partners, he helps clients address their five biggest concerns: preserving wealth, mitigating taxes, providing for heirs, protecting assets, and giving to charitable organizations.
