How can I mitigate the risk of a concentrated holding?
Diversifying your stock may be the right thing to do, but it can be difficult to give up the position that represents the source of your family’s success. Families hold onto their stock for other reasons too: to protect against capital gains taxes or retain a control position in their company.
Every situation is different. But you have to consider both the personal and financial ramifications of holding a concentrated position. Our Research Report, Concentrated Stock Portfolios, indicates that single stocks are, on average, 40% more volatile than a diversified portfolio. In fact, 92% of the S&P 500 constituents experienced a higher volatility than the S&P 500 Index itself in the annualized ten-year period ending June 30, 2013, according to the report. And while the equity market eventually recovers from adversity, not all individual companies do.
What does this mean for you? That depends on many things. What is your risk tolerance? Is it better to pay capital gains taxes today? What will the trade-off be of remaining concentrated? Which strategy will help you sleep comfortably?
We’ve worked with private families for more than thirty years. Our specialty is figuring out the best options for your family now and for future generations.