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Aug 23, 2016

As an executive, how do you feel about the concentrated stock position you hold in your company?

Ever wonder how much company stock you should own in your portfolio? As an executive who’s still actively employed, or one nearing retirement, you should.

You should also follow this mantra: Concentrate to create wealth; diversify to defend. That way, you’ll be able to live with both the best-case scenario (appreciating stock price) and worst-case ones (static/declining stock price or untimely termination).

Still, not everyone adheres to that advice: If, for instance, you have been working for a publicly traded company for most of your career, and you’ve risen to the executive ranks there, the odds are pretty good that you have more than 50 percent of your net worth in just that one stock.

Chances are also pretty good that this does not bother you. But it should.

The financial term “concentrated position” means that a single security makes up more than 10 percent of a portfolio. Interestingly, this tends to be at the upper limit of acceptable diversification rules for most professional money managers.

Yet this concentrated position might not work for you. Instead, when you’re an actively employed executive, 10 percent is considered low when you are trying to:

1) align your interests with those of shareholders; and 2) maximize the wealth-creation potential inherent in your executive stock-based compensation.

If your current advisor keeps beating the “sell your company stock, so I can get paid to manage the proceeds ‘drum,ʼ ” let’s talk.

In my experience, you can accomplish #1, while taking on an acceptable level of risk pursing #2 when you:

  • See the whole picture. At least annually, determine the total amount that you own in your company stock and divide that by your total net worth (assets minus liabilities).
  • Understand the risk. Remember that, as a leader of an organization, you are likely to be (overly) optimistic about the future of your company—just the way your executive peers 1) are at your main competitors; and 2) were at the largest companies that have gone bankrupt (Lehman Brothers, Washington Mutual, WorldCom). So, consider yourself warned. Then, get some outside advice: an objective, third-party opinion of your company’s stock and options-price volatility.
  • Concentrate to create; diversify to defend. Is there an amount that you have created by concentrating in your company stock plans that you now want to defend? If so, diversification into a well-balanced portfolio is your best defense. I think that approach makes more sense than someone arbitrarily
    telling you, “No more than 25 percent!”

Have I discovered some hard and fast percentage that magically works for all executives at all companies? No. In fact, I don’t think that there should be a one-size-fits-all investment strategy for actively employed executives. I certainly recognize the benefits of risk control for executives near or in retirement. And I recognize the importance of designing a well-diversified portfolio.

But stock-based compensation from a growing company (one that you know better than others) is one of the primary benefits of your occupation. To set too strict a limit is to not understand what motivates
most executives.

So, if your current advisor keeps beating the “sell your company stock, so I can get paid to manage the proceeds ‘drum,ʼ” let’s talk. Better yet, you talk and I’ll listen, to figure out what’s important to you.

This is intended for informational purposes only and should not be construed as personalized investment advice. Please see your financial professional regarding your specific situation.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Savant Capital Management is a Registered Investment Advisor. Please contact Savant to find out if the firm is qualified to provide investment advisory services in the state where you reside. Savant’s marketing material should not be construed by any existing or prospective clients as a guarantee that they will experience a certain level of results if they engage Savant’s services.

This article was originally published in the October/November 2016 issue of Worth.

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