Managing Concentrated Positions
It is extremely common that any one investor might have one stock that is greater than, say, 10% of their portfolio. This can be the company they worked for over decades. This could be something inherited from a relative that has passed. It could be that they bought it and it just went up in value over the years. They came to the advisor struggling with what to do with that stock.
Managing Portfolio Capital Gains
Remember a few things about this dilemma. First, remember the tax consequence issue. Is this a stock one inherited where selling it would literally create for them a massive capital gain?
That circumstance should be avoided. This has happened to me on multiple occasions over the years. The stock might be sluggish and poor performing, but that capital gain stares the client and me in the face every year. We would either trim a little off annually and replace it with companies with better growth prospects, or we would simply work around it. We avoided other companies in the sector so our sector weighting wasn’t too out of whack.
Why you need to pare down your concentrated positions
Want a few examples of why you need to manage the weight of concentrated positions?
Think GE during the Jack Welch era…and then Jeff Immelt.
Travelers Group and then Citigroup during the Sandy Weill era…and then Chuck Prince.
And the best one of all…Enron during the Ken Lay era
Manage those positions down. Not necessarily overnight. Not even over one year. But don’t have the stock of any one company dominate your portfolio. Hold your nose and pay the taxes if you must.
About Michael Ross
Michael Ross is a 30+ year veteran financial advisor. After 30 years with Morgan Stanley, he is now an independent financial advisor who excels in helping business owners exit their businesses and move to the next phase of their lives.
Advisory services are offered through Integrated Advisors Network LLC, a registered investment advisor.
Learn more: www.mylatticewealth.com
