A couple of weeks back, I was reading an article in the Wall Street Journal discussing how General Electric stock had fallen by 50%. That’s right folks, 50 percent. A few years back, anyone would have thought of GE as a stable financial option that would never see a fall of 50%, but lo and behold, it did.
While the drastic stock drop was enough to leave me shocked, I also couldn’t get over the number of previous employees who had all their money in GE stock who lost 50%. While GE stocks would have been a part of their compensation plan, I know many people who continue to have all their eggs in one financial basket. As GE has proven to us…that isn’t always a sound financial decision.
So why are people so passionate about one stock option?
For some reason, clients can develop an emotional attachment to one particular stock. I rarely find this to be the case with mutual funds, but something about stock sticks with people.
I’ve had instances before where clients of mine inherited stocks of Pepsi from their parents. While this stock is still performing well, I pointed out to them that there are better returns on different options, and Pepsi didn’t need to be 50% of their portfolio. But those stocks were a residual tie to their parents. In the end we kept a nice amount of Pepsi, while still diversifying their portfolio enough that if Pepsi took a dive, their finances would survive.
While I’ll admit I’m a dollar and number sign kind of guy, I always try and be aware of the emotional elements of certain stocks and act in the best interest of my clients while bearing that in mind.
In many businesses, part of a compensation plan includes stock options. Perhaps for some people their sole venture into the stock market are with the stocks they’ve been given by their employer. Either way, we often find when stocks are given as part of a compensation plan they often make up far more of a person’s portfolio than I would deem safe. As soon as stocks become an option I would advise seeking out a financial advisor to help you sort through next steps and best practices.
Another situation I often hear from people is they have a large investment in one stock, and it’s done exceedingly well… and now they don’t want to pay taxes on that by selling and diversifying. If you’re concerned about taxes, check out our article on "Strategies to Minimize Income Taxes on Investments."
No one gets into the market with the intention of losing money. So, when I see a client with a portfolio that’s made up of predominantly, or solely one stock, I often suggest diversifying. One resistance I often meet is that no one wants to sell when the stock is doing exceptionally well. However, no one wants to sell when it’s under-performing either because then they feel like they’re losing money. When in reality, the stock is only down from that extreme high, not down from their purchasing price. Either way, the amount of money you’re losing in this instance is far less than you would lose if your one stock was G.E. and you lost 50%.
The thing with holding onto solely one stock for any of these reasons is it can cost you. Technologies change, as do many industries. When changes occur, some companies excel while others go out of business.
While I don’t believe in scare tactic finances, history has proven time and time again that not every company has a 200-year life span. Businesses like RadioShack, or PanAm, or more recently Toys R Us were outlived by their investors. Their investment died with the company.
While there is no magic wand to solve your financial woes, at Heller Wealth Management we have tools that help us to decide where our investments should remain.
So, if you’re looking at your portfolio, and are wondering if you’re investment strategy is reflective of your risk tolerance and diversification needs, don’t hesitate to call us today.