Concentrated Stock Positions Can Cause Pain

There was a great article in this past weekend’s edition of the WSJ about the pain that a concentrated stock position may cause. We have many clients come to us with concentrated positions either due to an inheritance or simply a position that was purchased many years prior. However they have acquired this large holding, it typically has created an emotional attachment and thus becomes a difficult task in trying to pair back the holding.

As the article points out, the problem with holding a large position in any one stock is that the stock owns you rather than you simply owning the stock. Think of it as the proverbial tail wagging the dog as opposed to the dog wagging the tail when it comes to your portfolio’s performance. Whether the stock appreciates significantly in price or decreases significantly in price, the outcome is magnified in the portfolio’s performance.

Another point made in the article is the “regret” associated with action or no action when there is a large price swing in the stock. Regret can occur if one trims back a position and then watches it subsequently appreciate. Similarly not trimming back and watching it go down may cause just as much regret. Both forms of potential regret add to the emotional attachment of the position. The article goes on to state that emotionally diversifying is as important as financially diversifying.

We recommend to our clients who come in with large concentrated positions that they put a plan in place to systematically reduce exposure over time. Of course, tax consequences need to be taken into account so trimming a predetermine amount each year may prove to be the best strategy. We believe having a game plan that reduces concentrated exposure over a regular time period diminishes the emotional toll of the decision making process.

Below is a link to the article if you wish to read it.
http://m.us.wsj.com/articles/BL-MBB-15366