By Greg Sullivan

Our world may indeed be unpredictable, but often that’s true of the specifics rather than the generalities. After all, there are many events we call accidents that are not entirely unpredictable. Statistically, a driver is likely to be involved in three or four vehicle collisions over a lifetime.* Car crashes happen with regularity, yet you never intend them; and on any given day you are not likely to think you will be in a collision. In the same way, you don’t plan for your deck to collapse during a party or for your spouse to die before you, but these things happen to people every day.

As a financial advisor, I work with my clients to ensure that they are as protected as possible from life’s unpredictabilities. Often, this involves recommending adequate home, life, and umbrella insurance policies. But it also includes evaluating market risk.

Single-Stock Risk

People may be reluctant to sell company stock in which they have significant investment because they (or their family) have built the company and they are emotionally attached to their investment; they may be privy to the details of fundamentals and have faith that the company is solid, or they may feel that the historic strong performance of the stock is an indicator that it will continue to soar.

But there are no guarantees, and those who are unwilling to diversify may face unhappy consequences down the road. A concentrated position in a single stock presents a substantial risk. The stock may have been the source of your good fortune, but it can just as easily lead to financial disaster.

Even large companies that appear to be stable may suffer sudden losses due to idiosyncratic risk—specific risks associated with the particular circumstances of a company or industry. It happens more often than you may think. When a company is hot, it may be the darling of Wall Street, but two years later it can be struggling or even out of business altogether – remember Pets.com, Sharper Image, Lehman Brothers?

If you keep all your eggs in one basket, you risk being devastated if that basket gets smashed.

Hold or Sell? It All Depends on Your Goals

I had a client, heavily invested in company stock, who wanted to build a multimillion-dollar home. I told the couple they didn’t want to sign on a high-priced real estate deal while sitting on that stock—it’s too risky if the stock price drops—but the husband didn’t want to sell because the stock was doing so well. “Why get off the winning horse right now? Let’s keep riding while the horse is winning,” he told me. I asked him whether jeopardizing their retirement, which was right around the corner, was worth gambling that the stock would keep rising.

I told the clients firmly that if I were in their position, I would sell the stock and begin construction on my dream home; but if they were not ready to sell the stock, they should not sign a commitment to buy the land and build the house. Husband and wife deliberated for a couple of days, and then the wife called me and said, “We are going with your advice. We hate to sell the stock right now, but we have to trust that you know what you are doing. And we want the house and we want to retire soon.”

As luck would have it, we sold near the all-time-high stock price, at about $90 per share. Just two years later it was $15 per share. Not only did our clients get their dream home, they are happily enjoying their retirement. But neither of these things could have happened had they not made the decision to sell the stock.

Don’t let greed get in the way of a great retirement. Make sure you have a clear process in place for making decisions that will help you reach your long-term goals.

Cheers,
Greg

To learn more about Greg or want discuss retirement visit, SBSB Financial Advisors.

* “How Many Car Accidents Occur per Year?” Fetterman & Associates. Accessed August 20, 2017. http://www.lawteam.com/2015/07/27/how-many-car-accidents-occur-per-year/.