Too Much of a Good Thing - The Risk of Concentrated Positions
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Too Much of a Good Thing

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.