The Risks of a Concentrated Stock Position in Your Employer’s Stock

The Risks of a Concentrated Stock Position in Your Employer’s Stock

One of the most common mistakes investors make comes in the form of overconcentration of their investments in their company’s stock. It’s understandable to want to invest in the company you’ve spent a great deal of time with and have a personal connection to, but overdoing it puts your savings in jeopardy. 

In this article, you’re going to be exposed to what overconcentration is, its risks, and a recent example of how it has hurt investors. Additionally, you’ll be provided with actionable steps you can take to hedge against its impact on your financial future.

What is Overconcentration in Company Stock?

Overconcentration happens when you invest too much of your portfolio in a single position. This can be a common occurrence when it comes to your company’s stock. That’s because organizations often offer a variety of incentives to invest with the company. These incentives can include stock options, employee stock purchase plans (ESPPs), and discounted stock offerings. 

There can undoubtedly be benefits to investing in your organization. However, it’s important to not let your employer’s incentives cloud your better judgment. There are risks with buying company stock too- especially when you’re over concentrated

Risks of Overconcentration in Your Company Stock

There are several risks that come with overconcentration in your company’s stock. One of the biggest comes in the form of market volatility, which is a measurement of the price fluctuations of a given investment. 

With overconcentration, market volatility can seriously disrupt your liquidity. You may be looking to sell shares of your company’s stock when its value decreases suddenly. Keep in mind, events completely outside of your company’s control can still impact the value of its shares (ex: natural disasters, politics, and supply chain issues). 

There’s also the risk that your company fails. Employees can be left blindsided by incompetent leadership, bankruptcy, or systemic fraud. In extreme cases, company stocks can become virtually worthless overnight, costing those who are overly invested a painful amount of savings with no option to ride out the downturn. In the worst of these cases, employees can lose their retirement savings and the source of the income all at once.

Lastly, you can also view opportunity cost through the lens of risk. Overconcentration in your company’s stock may also be limiting your upside potential. Even if your company continues to do well, other companies may have done even better. Your portfolio’s returns can be even higher if you’re invested in an assortment of companies rather than just your own. 

Using The Recent Banking Crisis as an Example

You have probably heard about the recent struggles of Silicon Valley Bank and Signature Bank. Their failings have been all over the news. 

The collapse of both these banks serves as a stark reminder that even seemingly well-established businesses can fail, leaving employees and investors alike dealing with the consequences. Even as an employee of a bank, it’s important to have your investments held in more places than one. Overconcentration in any one company or even sector can put your portfolio at substantial risk.

Strategies to Avoid Overconcentration in Investments 

One of the most effective strategies to avoid overconcentration in your portfolio is diversification. By definition, diversification works by spreading your investments across different asset sectors and regions. That said, what’s considered “healthy” diversification will depend on individual factors like your age, retirement goals, and risk tolerance. 

Another way to protect against overconcentration into your company’s stock is to set an investment limit. This puts a maximum threshold on how focused an area of your portfolio can be. For example, maybe you decide to limit your exposure to any one position to only 5% of your portfolio. You could also set a limit on how concentrated you want to be in particular sectors as well.

Lastly, a disciplined financial plan that’s aligned with your vision for the future can help. By taking a disciplined approach to investing, you’re able to form a portfolio that is tailored to your long-term goals, remains consistent over time, and is regularly reviewed for performance. 

How Fischer Investment Strategies Can Help You Further

At Fischer Investment Strategies, we know the dangers of stock overconcentration all too well. The collapses of Signature Bank and Silicon Valley Bank have yet again proved why it’s important to diversify your portfolio. 

By working with a financial advisor, you can get help in taking advantage of your company’s stock, diversifying your investments, and protecting your savings from the risks of overconcentration. You’ll be able to work with a plan that’s specifically aligned with your values and long-term goals.

If you’re interested to learn more about what you can do to avoid overconcentration, or you’re ready to put a plan in place to protect against it, please don’t hesitate to reach out. You can call us directly at our Westlake office at (805) 418-7686, or our San Clemente office at (949) 433-7768. Feel free to also schedule a complimentary consultation at a time that works best for you. 

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Financial Advisor at Fischer Investment Strategies | Website | + posts

Ted Fischer is a Fee-Only Certified Financial Planner® & fiduciary, and the founder of Fischer Investment Strategies.

Drawing from more than 25 years of experience in the financial services industry, Ted's expertise includes retirement planning, investment analysis, tax planning, estate planning, and insurance.

Ted has an extensive academic background. He received his Certified Financial Planning (CFP®) designation from UCLA in 2011. He became a Qualified Plan Financial Consultant (QPFC®) and an Accredited Investment Fiduciary (AIF®). Ted has a Bachelor of Science in Marketing, with a minor in Finance, from San Diego State University.

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