Here's a simple question that cuts through a lot of noise for investors sitting on a single, large, appreciated stock position:
If you woke up this morning with a duffle bag full of cash equal to the value of that single stock position that has appreciated in value, would you use it all to buy that same stock today?
If your honest answer is "no", it's worth pausing on what that means. Because holding the position isn't a decision you made once. It's a decision you're making again today, and that you'll make again tomorrow. Every day you don't sell is, in effect, a day you've chosen to buy.
It’s easy to feel proud of a single appreciated stock position. Maybe it represents a strategic stock selection that continues to be the darling of your portfolio. Maybe it represents years of purchases of your employer’s stock through payroll deductions and a corporate matching program. It can feel like you have “grown up” together. But the market doesn’t see it that way.
The market doesn’t know your stage of life. It doesn't care about your risk tolerance, your anchoring point, or the story you've told yourself about why this position is different. The market just moves. And the positions that have run up the most are very often the same ones sitting closest to the edge. A position that has grown to $4 million might not have a gentle range of outcomes ahead of it. Hypothetically, it could just as easily become $8 million. Hypothetically, it could just as easily become $2M. Both are plausible and neither is likely to announce itself in advance.
I vividly recall meeting a client with a $5 million portfolio. $4 million was in one concentrated “winning” position and $1 million was invested with me, in a boring, stable, pension-like portfolio. The client was considering whether to sell the $1 million “laggard” to purchase more of the “high performer”.
I told him to think through both scenarios. If he was right, and the stock continued to do gang busters, well then the lagging, diversified portfolio will be nothing more than a rounding error next to his glorious stock position. But if he was wrong, he would have risked his family's safety net.
Most investors can point to a stock position that they once thought was invincible. The one that was in all the financial press and seemed to go up in value forever…..until it didn’t.
That is what concentration looks like.
Concentration doesn't feel risky while it's paying off. It only feels risky in hindsight, once it's too late to do anything about it.
Recognizing an over-concentrated position is the easy part. It’s just math. Deciding what to do about it is significantly harder. How much should you sell? When? How should you manage the tax consequences of unwinding a large gain? Instinct will not serve you here. Your financial plan will.
If a big chunk of your wealth is tied up in one position, it might be worth asking yourself the duffle bag question before the market asks it for you.
Have questions about managing a concentrated stock position? Reach out to your MVP Wealth team. We’d be happy to walk through your options.
