Is Your Net Worth Highly Concentrated in One Company? Here Are Three Things for You to Consider
Equity compensation can play a significant role in building long-term wealth.
But receiving a majority of your income via equity compensation, or having a large amount of your net worth invested in one company comes with risks.
2022 was a year that showed a lot of younger investors, and reminded the veterans, what it feels like to get their faces ripped off.
I shared a piece from Michael Batnick last year that highlighted the companies that were down 80+% from their highs:
One day, your portfolio is in the six- or even seven figures, and the next you are holding on for dear life.
No company is immune from volatility, and even companies that are “too big to fail”, “do no wrong” or “only go up”, can experience extreme ups and downs, depressed stock prices for long periods, or events leading to their ultimate demise.
So, if you are someone who has a lot of your net worth concentrated in one company or if you are receiving a lot of your compensation via equity in your company, keep these three things in mind:
Take Gains & Diversify: Take advantage of your wins, lock in your profits, and provide yourself flexibility. IT’S OK TO TAKE SOME RISK OFF THE TABLE. Why are you saving money? What are you looking to do with it? Ask yourself these questions so you can use these proceeds to help you generate momentum and work towards your goals. Whether its paying off debt, putting your kids through college, buying a vacation home - divesting out of a concentrated position can help you achieve your goals and aspirations.
Control Your Emotions: Most people do not have the stomach for the volatility individual stocks can endure over the long-run. Can you handle the stress? Will you be able to sell a company that you fell in love with? Finding a winner could boost your ego to the point you start taking unnecessary risk. Remember, if a stock has the ability to double in price within a year, then you better believe it can certainly get cut in half within the same timeframe. If you are telling yourself, “I’m just going to wait until the company bounces back,” that’s a rational thought. But if a stock falls by 80%, it has to then rise 400% to get back to even.
If you owned Intel’s stock, you have been waiting 20+ years for the stock to get back to where it once was:
Remember this from a prior blog, “Of the 28,853 companies that traded on U.S. markets since 1950, 22,469 (78 percent) died by 2009.” In fact, “half of all companies in any given cohort of U.S. publicly traded companies disappear within 10 years.”
Nothing lasts forever, take advantage of opportunities when they present themselves.
Taxes: If there is ONE thing American’s can agree on, it’s that we all hate paying taxes. I get it, you don’t want to pay taxes on large gains. But don’t let that be the reason you expose yourself to concentration risk. Lock in profits, pay the taxes, and then redeploy those proceeds into other assets. How long you’ve owned the company dictates your capital gains tax. Most people pay no more than 15% on their long-term capital gains (owned the stock for longer than 1-year). Short-term capital gains are added to your income and taxed at your ordinary income tax rate.
One silver lining of a brutal year in the stock market is to create a bucket of ‘realized losses’. These investment losses can be used to offset any future gains in your investments. Something to keep in mind.
We should strive to become risk intelligent and not risk averse. We need to take risks. But only bet what you are willing to lose, and make sure that any investment loss wouldn’t completely derail your financial future.
You may think that you need all your investments to be ‘home runs’ in order to live the life you want. But singles and doubles still win ball games. If you can average 6-7% per year with your investments, consistently, you are well on your way to financial freedom.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.