AVOID GAMBLER'S RUINBridging Concentrated Stock and Diversification
by Alex Golubev, Merriman Portfolio Manager, CFA®
If you have accumulated significant wealth in just a few stocks, congratulations! But beware that not diversifying now may be one of the costliest decisions of your life.
- Limiting downside stock risk, prior to diversifying.
- Leaving some upside, which could help pay capital gains taxes.
When making complex and important decisions, particularly those outside our expertise, we often revert to gut instinct and emotion. Investors often hold off from diversifying concentrated stock positions due to concerns over taxes, perceptions of insider knowledge in the company, or even feelings of loyalty (and guilt).
While these justifications may feel intuitive, the consequences of relying on them can be catastrophic to your financial well-being.
Understanding all the risks and factors of divesting and hedging concentrated stock positions requires relatively sophisticated modeling that reflects your goals, circumstances and even preferences.
To help you better understand this topic, we simplified it into an e-book.