It’s now the end of February and the shares have hit your E*Trade account. You’re now “X” amount of shares richer, but it’s held in the stock of AbbVie – the company who is paying you, and provides your benefits. Should you hold the shares and (hopefully) profit from the increased value, or sell them and invest in a diversified portfolio?
There are several reasons why it might not be advisable to hold just one stock in your portfolio.
Here are a few:
Diversification: One of the most important principles of investing is diversification, which involves spreading your investments out over a variety of assets to reduce risk. Holding just one stock exposes you to a significant amount of risk, as the performance of that stock can significantly impact the overall value of your portfolio. By contrast, if you hold a diverse mix of stocks, bonds, and other investments, you can potentially smooth out the ups and downs of the market and reduce your overall risk.
Risks from multiple angles: If AbbVie stock were to experience a significant drop in value or go bankrupt, it could have a devastating impact on your portfolio, and as you’re employed at AbbVie, your entire livelihood. In contrast, if you hold a diverse portfolio, the loss of any one investment is less likely to have a significant impact on the overall value of your financial well-being.
Limited potential for growth: Holding a single stock limits your potential for growth, as you are relying on the performance of just one company. By diversifying your portfolio, you can potentially tap into the growth potential of a variety of companies in different industries, giving you a greater opportunity for growth.
Emotional factors: Finally, it is worth considering the psychological implications of holding just one stock. (This is the factor that I hear most about with clients.) If you are emotionally attached to a particular stock, you may be more likely to make impulsive or irrational decisions based on your feelings about the company. By diversifying your portfolio, you can potentially take some of the emotion out of your investing decisions and focus on making more logical, data-driven choices.
In summary, while there is always the possibility that holding just one stock could lead to significant profits, the risks associated with such a strategy are generally considered to outweigh the potential rewards. For most investors, a diversified portfolio is a more reliable and cost-effective way to manage risk and potentially achieve long-term financial goals.
But as you may have seen from people like Elon Musk, Bill Gates, and Steve Jobs, holding a single stock can rapidly increase your wealth. Here are some pros to holding a single, growing stock position:
Simplicity: Holding a single stock position is simpler than managing a diverse portfolio of stocks. When receiving RSUs, you don’t have to do any management of your portfolio. The stock sits in your E*Trade account and your AbbVie position gets added to every year from vesting grants. While the position can be volatile, if it grows long term, then so does your overall portfolio.
Potential for high returns: If AbbVie stock performs well, you may be able to achieve higher returns than you would with a diversified portfolio. In fact, this is what holders of many US companies – either in their 401(k)s or regular investment accounts – have found. As they have added to their positions over time, been subject to stock splits and then seeing the stock price rise again, they have seen their wealth grow. But being in the right stock is a game of luck.
Specialization: Being an employee, you may have a deeper understanding of the company and its industry. This can make it easier to identify potential opportunities or challenges, and to make more informed decisions about buying and selling the stock. But be careful about how much you know, as it could be construed as insider trading!
Additionally, owning a single stock position can also have tax advantages. For example, if the stock has appreciated in value and you want to sell it, you can avoid higher tax rates by holding on to the stock for more than a year. By using losses that may have been generated from selling positions that haven’t done so well, you can reduce your tax exposure on selling this single stock position.
Conclusion: I have worked with clients where both scenarios (selling or holding) make sense. For those building their wealth, it usually makes sense to sell the stock and purchase a diversified portfolio. For those who have accumulated a diversified portfolio to support their goals, then building a concentrated position of one stock can be a fun way to try and accelerate the growth of this overall portfolio. If you’d like to see what I’d recommend in your portfolio, let’s talk.