I was in a meeting last week with a group of other local financial advisors. One of the advisors shared a story about a prospect (from long ago) that was a Yahoo executive. At the time, Yahoo stock was soaring. The advisor begged the prospect to diversify and engage in a strategy that would reduce his risk (buying long dated put options for his concentrated stock position). If the stock fell, he would have “insurance” to hedge his position in a single stock. Unfortunately, the prospect didn’t listen and lost a large portion of his wealth due to the falling Yahoo stock price in years ahead.

Often, clients have concentrated wealth from a business that is near and dear to them. Usually, one of the following is true:

  1. You inherited the stock from a parent/grandparent who worked at the company
  2. You worked at the company and believe it is going to continue to grow at a rapid pace
  3. You’ve owned the stock for a long time and believe it will continue to outpace the general market

The reality is that none of us can accurately predict which stocks will grow at an “above average” pace in the coming decade(s). Concentrated wealth can help you build wealth, but it can also be your demise.

My advice: Have a plan to reduce the risk of having concentrated wealth. Over time, figure out how to diversify your wealth so that your goals and lifestyle are NOT dependent on a single company’s performance.

Posted in 30s, 40s, 50s, 60s, 70s, Risk Management

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