The Questions to Ask About Concentrated Positions

John Boardman

We have worked with many affluent clients who amassed their wealth through concentrated exposure to a single asset.  Examples could include a corporate executive receiving ongoing stock awards, a founder of a company selling his or her business in exchange for stock, or even a property owner whose land value has appreciated markedly over time.  These are no doubt enviable scenarios to find oneself.  However, the trouble lies when the asset holder becomes paralyzed around the decision to liquidate some or all of the position to lessen exposure and mitigate risk.  There are countless strategies to consider from the very simple (just selling) to far more complicated strategies (i.e hedging strategies or charitable trust planning).  In our experience, finding the proper strategy is the easy part for us; convincing the client to sell is usually the hardest step.

As often as we have assisted a client in successfully diversifying out of a concentration, we have also witnessed the situation where an investor has held on far too long.  It is quite common for a previously successful investment to be forever categorized as such by the investor who owns it.  Our goal in these situations is to help the asset owner in removing emotions from the decision.  We accomplish this by posing five questions to the investor to uncover their most critical objectives.

  • If I had the money in hand today, would I buy the same amount I currently own?

We define a concentration as single asset exposure exceeding 10% of net worth.  Saying that, we have worked with clients whose exposure to an asset has exceeded 75% of their net worth!  In almost all cases, the client would never invest that percentage of their assets into one single investment.  Simply put, if you would not buy that much of the asset today, why would you own so much of it now?

  • What impacts my situation more? A 50% gain or a 50% loss?

This question is directly addressed in our planning process.  If we agree that a single asset is inherently more risky than a diversified portfolio, we must also agree that price swings could be much more substantial on a single asset.  For a client that has attained some amount of financial security, a substantial loss is usually more impactful than a substantial gain would be to their financial well-being.

  • Has my “exit price” changed over time?

This question plays directly to every investor’s psychology and, to some extent, greed.  It can be very easy to lose sight of your original goals once they are surpassed.  If you find yourself constantly looking for a higher price to sell an asset, you may be losing track or your original goal.

  • Looking back to when I acquired the asset, would selling at this price be deemed a success?

Similar to the previous question, this requires an investor to think about the lifecycle of their investment.  By not letting recent price performance influence your decision making, you are likely to make more objective decisions.

  • If taxes were not an issue, what would I do?

I save this question for last because taxes owed is the most common pain point around selling decisions.  It is important to realize that taxes will eventually be owed on an all appreciated assets (unless you plan on owning it until you die.)  If you sell, you will owe taxes, but you are also reinvesting at a higher basis allowing much more tax-friendly current and future access to the invested capital.  Yes, you will owe taxes on the gain, but a small amount of downward price movement could easily offset what taxes would have been paid had you been willing to sell at a higher price.

Concentrated asset ownership is a wealth creator (ask Jeff Bezos), but it can also be a wealth destroyer (ask Enron employees).  We believe we serve an important role in helping our clients understand when a concentrated position needs to be addressed.  Every situation and resulting diversifying strategy is unique and, as such, should be addressed in a customized strategy for that investor.  By answering the above questions, we can confidently steer an asset owner to an objective and sound decision on when to begin the selling process.

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