Everybody knows that concentrated positions can inject significant risk into your portfolio. Even with the intellectual knowledge of the risk, many people continue to hold these over-weighted positions. For some it is the allure of a good dividend perhaps from a company stock, for others it is a family legacy woven with pride of ancestors lost and guilt about dismantling the memory. These emotions tug firmly at the owners thought of selling. The scapegoat is typically paying capital gains tax; a sometimes large dollar amount given the concentrated position size. With this defense, the position tends to remain in the portfolio.
History has taught us different lessons about concentrated positions. It is not wise to hold more than 5% of the portfolio value in one stock. Stocks can be extremely volatile and can cause permanent impairments to your financial security. Having a plan to exit the stock position is the needed remedy to neutralize the strong emotional undertones of holding on. One way to do this is to decide in advance that you want to sell a certain percentage of the shares if the price falls to a certain level. Conversely, you may want to sell excess shares if the price exceeds a certain level and the position rises out of tolerance with the 5% weight. One way to do this is to place a stop order on the stock. If the stock drops or rises to a certain price, a market order will be automatically executed. These types of orders can be put into place for 6 months at a time. If taxes are owed, making quarterly estimates is advised.
Just as Captain Ahab hesitates in harpooning Moby Dick, hesitating to create a plan to address concentrated positions can lead to significant wealth loss. A professional financial advisor can assist in creating a plan to exit concentrated positions. At Rodgers & Associates we work with affluent clients to customize a strategy that is right for them.