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How We See It

Charlotte Anderson

Charlotte Anderson

August 17, 2012

Concentrated Equity:
Too Much of a Good Thing Can Be Hazardous to Your Retirement

It doesn’t matter how you got here, but here you are, nearing retirement with a large portion of your wealth tied up in one company’s stock. Perhaps you picked wisely years ago – a Coca-Cola Co., Wal-Mart Stores, Inc. or Microsoft Corp. – and have had a wonderful ride. Or you simply accumulated a large holding of your company’s stock through employee options or your 401(k). Now you face a dilemma.

Should you hold? Sell? Hedge? Diversify? Or at least begin diversifying?

There is no easy answer, because no two investors face precisely the same circumstances. If the concentrated position forms a significant but not overwhelming portion of your wealth, you may decide to hold – fully aware of the high risk of doing so – or hedge. You may decide to diversify, investing in an exchange fund or using a charitable remainder trust (CRT). Tax consequences vary.

Whatever your decision, try to escape the psychological baggage that adheres to every investment. Discard the idea that the future is sure to repeat the past. There may indeed be high return potential from the right stock, says one study, but “significant underperformance is four times as likely.” Step back from your holdings and analyze objectively your most suitable options. If you decide to diversify, you still must decide on how to accomplish that.

Diversifying in planned stages is a possibility. That allows you to keep upside potential in the stock while meeting your spending needs. Keep in mind that any timed strategy prolongs your risk exposure to this single stock. If you believe your investment horizon is long enough – taking age, health and goals into account – selling a substantial portion of your holdings and paying the taxes may be the best strategy, because, over time, your newly diversified portfolio will have time to outstrip the tax burden.

If you intend to use a significant portion of your wealth for philanthropic purposes, consider a CRT, through which you will receive a charitable tax deduction. The CRT will sell your concentrated position tax-free and arrange a (taxable) income stream to you from its newly diversified holdings.

If you find yourself holding a concentrated stock position and want to explore the most advantageous ways of dealing with it, please give us a call at TBT Financial Services.

Diversification does not ensure a profit or protect against a loss.

Material prepared by Raymond James for use by its financial advisors.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC, and independent broker/dealer, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are not subject to risks, insuring possible loss of principal.  Raymond James is not affiliated with TBT or TBT Financial Services, Inc.

Raymond James financial advisors may only conduct business with residents of the state and/or jurisdictions for which they are properly registered.  Therefore, a response to a request for information may be delayed.  Please note that not all of the investments and services mentioned are available in every state.  Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site.  Contact your local Raymond James office for information and availability


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