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Stock concentration: Opportunity or Risk?


When most people intend to save for retirement, they diversify into a wide variety of investments hoping that in aggregate the initial seedling they planted will eventually grow over time.


Investing rarely deals with certainties - just like life. You don’t live in a safe neighborhood, send your children to the best school, and provide them with enriching opportunities because you know for certain how their life will turn out. You simply try and skew the odds in their favor.


That’s exactly what diversification does and is known by a fancier name - Modern Portfolio Theory.


Modern Portfolio Theory tells us that over time there is substantial dispersion in individual stock performance.

  • Different stocks in different industries perform very differently

  • It’s impossible to predict the performance/outcome for a particular stock*

  • In a world of huge uncertainty and bubbles, the only certainty is that diversification is the best defense in managing/mitigating downside risk

* There were analysts that rated Enron a strong buy the year before it collapsed


If Rishi, who is an employee of a healthcare firm invested $400/month in a diversified portfolio for 40 years at a 7% return he would have over $1,000,000 when he retires. This is substantially more than most Americans would have accumulated and probably enough with social security benefits to live a comfortable lifestyle in retirement.


But, comfortable is different for each person and perhaps you need or want significantly more.


However, it can be difficult to find examples of people who have achieved $5MM+ of wealth by diversifying all their investments from the beginning.


For top-level executives who have wealth tied up in low basis stock or options, are drivers of wealth creation, believe in their company’s mission, and have extreme loyalty, is diversifying the right option for you?


So what do these three people have in common?

1. Elon Musk

2. Jeff Bezos

3. Bill Gates


They are three of the richest people in the world and have amassed their wealth by NOT diversifying. There are many lessons to learn from these inspirational leaders of our time but an aspect that is often overlooked is the amount of risk they took on.


Do you want to take the same level of risk or more importantly, do you need to take the same level of risk?


For every Bill Gates, there are thousands (maybe millions) of people who didn’t make it and if it was that easy, everyone would do it.


So how do you know how much risk is right for you and should you be wary of diversifying too early?


You may want to build a margin of safety at the portfolio level to help. This means that if your overconfidence or status quo bias reigns supreme and your judgment is wrong, the decision should not permanently damage the value of the portfolio and your goals.


As a high-performing executive, you may want to keep your equity concentration, especially if you’re young, so it allows for the longest time to grow and compound if your commitment pays off. But it also gives you enough time for alternatives (diversifying) if it doesn’t.


Consider speaking to Adviso Wealth to have a framework around whether you should keep all your eggs in one basket and what’s right for you.


Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.


To learn more, visit advisowealth.com or email sweta@advisowealth.com