Carefully planning a strategy that moves you from a large, concentrated position to a diversified portfolio spreads outcomes, good and bad, across a diversified group of accounts. And that achieves the ultimate goal: predictability.
Liquidating a portion of a large, concentrated position and using the proceeds to diversify a portfolio is not a difficult concept to understand. Still, for many investors, it is a very difficult strategy to accept, let alone execute.
As a starting point, we often advise our clients who have emotional or behavioral attachments to a large, concentrated position to sell half and use the proceeds to create a more diverse set of holdings. Selling half can typically solidify their financial lifestyle and leave the remaining half as gravy to provide for charities or future generations.
Simply put, having highly concentrated investments in a limited number of stocks or sectors means you not only have a less predictable outcome, but an outcome you may not want.
Over the past decade-plus, the market has produced a lot of prosperity for investors, sometimes at record levels. Then came 2022 and a market dealing with everything from the highest inflation in 40 years, to a seemingly omnipresent pandemic, to a war in a small country with global reverberations.
Amidst this turmoil, some seriously high-profile stocks have just plunged in the first half of 2022. That includes the likes of Netflix (-71 percent) and Amazon (-36.3 percent) and Apple (-23.0 percent), Home Depot (-33.9 percent), and Tesla (-36.3 percent). Now imagine a high percentage of your stock holdings are concentrated in any one of those companies. Because of that concentration, your entire portfolio is going to take a significant hit.
One might argue, “Well, yes, they are down now, but they’ll come back.” Or, maybe not. A 2014 study found that “…since the early 1980s, 40 percent of all companies experienced a severe loss and never recovered.” Think of companies like GE, a true American icon, that is now around a quarter of the size it was 22 years ago. The world is changing faster than ever and the leaders of today will not necessarily be the leaders of tomorrow.
The one thing that most likely won’t change (and one of the reasons investors are gun shy to sell) is capital gains tax. We have solutions in place to reduce and in some cases eliminate this mental and monetary roadblock.
To sum up, carefully planning a strategy that moves you from a large, concentrated position to a diversified portfolio spreads outcomes, good and bad, across a diversified group of accounts. And that achieves the ultimate goal: predictability.
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