According to Innosight, the average lifespan of a company on the S&P 500 Index is 20 years. Reading that statistic made me think about all of the investors who have large amounts of their wealth in one or just a few places. Many own stock in companies that make up the S&P. Many believe that these investments are bulletproof because the companies are “too big to fail”. However, bankruptcy, buy-outs, competitive failure, economic forces, technology, and thousands of other factors can eliminate a business’s competitive advantage. Small businesses, real estate, and many other assets are subject to the same risks.
Let’s say that you own such an investment. Maybe you bought it. Maybe you inherited it. Maybe it was a gift or shares from an Employee Stock Ownership Plan. Maybe it is real estate or business assets. Whatever it is, it occupies a significant portion of your net worth.
In the financial business, we would call that a “concentration”. Imagine your entire net worth is a pie. And one slice is a LOT larger than all the other slices. This is both great and can be very hazardous at the same time.
Kudos to you for having an investment do so well! If you shrewdly invested in a stock or any other asset that grew tremendously over time, then you scored a big financial win!
If this happens for you, make sure you understand that you have to stay disciplined in your approach. Through a mix of human emotion, psychology, and math, we can easily get trapped into just holding that investment longer than may be advisable.
The business landscape changes. The world changes. Techology changes. Industry changes. Companies change. Your portfolio should adapt to the world around it over time.
Don’t fall in love with an asset because it’s gained value in the past. Periodically ask yourself if this asset still is the right thing for you to own. Enlist the expertise of a qualified professional to help you see your situation with less emotional connection to your wealth. A third-party perspective can be invaluable in helping you make rational investment decisions. At the very least, you have to understand the potential dangers of having a large part of your wealth put in one “basket”.
Your advisor can also help you work out strategies for unwinding that position that might work best for your life situation, your tax perspective, and your financial future.
As always, this and many other articles can be found on our website at www.paducahfinancialconsultants.com. Please share with anyone that might find this information useful!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
No strategy assures success or protects against loss.