What is Concentration Risk? Episode 16

Today we will be talking about another important part of equity compensation, and that is concentration risk. Perhaps you’re wondering what exactly that is and how it happens so I’ve got a few examples to clarify it for you. I’m going to share some misconceptions about holding large amounts of a single stock, especially if it’s stock in the company you work for. We will also touch on some ideas to help mitigate concentration risk. Be sure to tune it so you don’t miss a thing! 

You will want to hear this episode if you are interested in...

• Concentration risk… how it happens? [1:17]

• Learn from market history [3:01]

• Misconceptions about holding a large percentage of your portfolio in 1 stock [5:24]

• Ideas to mitigate concentration risk [8:27]

• Differences between stop orders and stop-limit orders [11:08]

• This week’s FLASHBACK [12:50]

Misconceptions about concentration risk

As they say, don’t put all of your eggs in one basket, and that couldn’t be truer when it comes to holding large amounts of stock in the company you work for. I mention some doozies from the past in the episode, so check those out. 

I’d like to list a few misconceptions that I believe some people have about holding large percentages of your overall financial picture in one stock. One, I see, is “safety” from those who think their company’s stock is safer than any other company’s. I mean who wants to believe they aren’t working on solid ground? Another is “analyzing”, just because an analyst says it won’t, does NOT mean a stock will not drop value like a stone thrown into the water! Finally, there is an old misconception that says if you keep paying attention to just one stock that will keep it going up, up, up. You may disagree if you had owned Amazon in 1999. Listen to the episode to get my feedback on these delusions. 

Being aware is ½ the battle of mitigating concentration risk

The first and probably simplest way to avoid this risk is diversification and that just means not putting all the aforementioned stock eggs into one basket. Add other things to your portfolio that will help bring down the volatility and better control the risk. This may also mean selling off some of your holdings. Secondly, adding too many stocks— beyond a couple of dozen— doesn’t reduce your risk as much as you might think. And one last tool I’d like to mention is the stop order and the stop-limit order. Implementing them could be your saving grace in a flash crash. Join me for more on how these can alleviate some risk in this episode of Equity Compensation Guidebook!

This week’s FLASHBACK: The coolest cooking gadget since fire

My dad passed when I was pretty young but I remember that he like technology or maybe then it was more like gadgets. We are talking late 70’s and the most cutting-edge tech he ever brought home was a... microwave! It was HUGE and required a heavy-duty piece of furniture to hold it but back then it was a BIG DEAL. It was pretty cool to have one in our house even if it was just a glorified food warming machine that was primarily used to heat up hot chocolate. Ahhh the good ol’ days! 

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.