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Goals-based planning

Worried you may own too much of one stock?

Oct 4, 2024

Discover how much of one stock you might hold—and still stay on track to reach your long-term goals.

Today’s market highs have some investors wondering if they are a little too concentrated in certain positions. The banking crisis we saw last year is the latest reminder that wealth destruction often happens for reasons that are outside of our control.

A look at your concentrated holdings may be advisable. Our research consistently finds that concentrated positions historically have been both a great creator and destroyer of fortunes.1

A widely accepted rule of thumb claims that a properly diversified portfolio must have no more than 10 to 20 percent of total investment assets in a particular stock. But reality is usually more complicated. Certainly, standardized percentage-based rules never made sense for many investors, especially the top executives and owners of public and private businesses who cannot help but have significant holdings in their companies.

Instead, we advise against automatically applying a simple solution to any concentrations you may have. We find it helpful to take a nuanced approach to help clients find their “number.” Your acceptable level of concentration will depend on your circumstances, objectives and tolerance for risk. A complete conversation is recommended. 

Here, though, we can describe the general framework we use to help clients determine how much diversification they might need to achieve their goals.

Step 1: Identify why you hold a concentrated stock position

There are many paths that lead people into a concentrated position.

Perhaps you are employed by the company whose stock you hold and there are limits to diversifying (i.e., company mandates and/or public perception).

Or maybe the root cause is a sense of control: Because you work at (or own) the company, you feel you understand it best and can have the most impact on its prospects?

We find many clients are simply waiting for their stock to hit a specific price target. Especially in volatile times, it can feel difficult to sell a position for less than it was worth just a few weeks ago. Are you waiting for a rebound to prior highs?

Step 2: Assess your circumstances

Take a thorough look at your full financial picture so that you can be clear about how important diversification might be for your long-term fiscal health.

Which category best describes your situation?

1. Protected—You could lose your entire concentrated position tomorrow and still be able to support your current lifestyle and long-term goals 

2. Vulnerable—You need a portion of your concentrated position if you are going to stay on track to achieve your long-term goals 

It’s obviously reassuring to see proof that you are in the “protected” category and identify precisely how much downside you might absorb before your lifestyle is affected. Such knowledge also can help give you confidence that, if your stock values hold steady or improve, you might be able to dream bigger and start implementing a variety of planning techniques to achieve these new goals.

If you find yourself in the “vulnerable” category (and even many of our wealthiest clients do), we recommend tallying what you are trying to achieve and backing into an appropriate amount of your concentration you’d need to diversify to achieve these goals. This is your “minimum dose of diversification” benchmark.

Then we suggest shifting your focus.

Rather than looking at how much of your balance sheet is in the concentrated position, we suggest evaluating how much (and which parts) of your future might be at risk due to your concentration.

This exercise is often empowering because it lets you see your target number and assess all potential fixes, given your earning capacity, potential stock performances, spending and goals. . 

For example: Imagine an investor has a $100MM balance sheet but $50MM is in a single stock. Obviously, she is concentrated by standard definitions. However, if she is 50 years old and spends $1MM/year, she should be able to have comfort knowing that her entire concentration could zero out tomorrow but her lifestyle would not be impacted.

However, if that same person spent $2MM/year, the concentrated stock’s performance would be crucial to sustaining her current lifestyle.

Lifestyle spending is a vital factor in assessing your vulnerability

Assume a 50-year-old has $100MM net worth with $50MM in a concentrated position.

Source: J.P. Morgan Private Bank. Data as of September 2024. This chart illustrates how much would be needed today, to fund $1MM or $2MM of annual living expenses to age 90. Accounting for 2.5% inflation, income taxes and stress tested for volatility through a Monte Carlo Analysis, she would need approximately $35MM in a diversified balanced allocation to spend $1MM/year leaving the $50MM concentrated position untouched. When increasing expenses to $2MM, she would need $68MM diversified. In this case she would need to net $18MM from her concentrated position. IMPORTANT: The projections or other information generated by this Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The results of this Analysis may vary with each use and over time.
A 50-year-old investor has a $100MM balance sheet, but $50MM is in a concentrated position. If she spends $1MM/year, she does not need to diversify her concentrated holding and only needs her $50MM of diversified assets. If she spends $1.5MM a year, however, she will need to diversify $25MM of her concentrated position, and will need the $50MM of her diversified assets plus the $25MM net from the concentration.

Step 3: Free yourself to find your best path

If all this assessing sounds like going for the medical exam you know you need but would rather not schedule, here are a few scientifically backed thought exercises that could liberate you: 

  • Imagine it’s not yours—Pretend these investments belonged to your friend, James, and he asks you to give him financial advice. “Is this a good use of my capital? Does this look like a smart idea? Am I too concentrated?” What would you tell him?
  • Start from now—Imagine you don’t own your concentrated holding, but were instead presented with the opportunity, right now, to buy the entire position at a price exactly equal to however much you have invested. Would it be a good investment for your goals? 
  • Regain control—In holding onto a concentrated position, we’re actually not exercising control but, rather, relinquishing it. We’re sitting back, waiting for circumstances to dictate our options. Real control comes from creating a strategic plan for our wealth.
  • Remember your goals—Why are you investing your money? What is the intention of your wealth? It’s rare that we want a specific number of shares in a specific company or industry. Few set out to have X percent of ABC Company. Instead, we want what that investment, that wealth, might provide. So ask yourself: Do these consolidated positions help you pursue these desires? Or is there a better way?

We can help

Your concentration may be both an opportunity and a risk. But only by sizing that potential risk and what it may mean for you and your family, can you begin to choose from among the many solutions that might be available. 

Speak to your J.P. Morgan team about having your concentration risk assessed. Turn any concern about volatile markets you might have today into a chance to chart an even better path to achieving your financial goals over the long-term.

 

1 Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, “The Agony & the Ecstasy,” J.P. Morgan, March 15, 2021.

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