Director of Portfolio Strategy – Adam Phillips, CFA®, CFP®
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
Special Guest: Director of Financial Planning – Erin Voisin, CFP®, ChFC®, CDFA®
Also a go-to resource for national media, Erin is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Chartered Financial Consultant® (ChFC®) and a Certified Divorce Financial Analyst (CDFA®). An Enrolled Agent with a Master’s degree in Accounting, she is a CFP® Board Ambassador and leads the EP Wealth Advisors Financial Planning Department, a department that is integral to the services the firm’s entire team of Advisors provides to all clients.
A concentrated position simply means an individual investment that represents a significant percentage of a portfolio’s total asset value. This may be because the asset has appreciated greatly and grown faster than other components of the portfolio. Often, though, it’s because it’s tied to stock options, restricted stock, or an Employee Stock Ownership Plan (ESOP) in a company the portfolio owner works for. Sometimes there’s no choice in how such an asset accumulates. And sometimes enthusiasm for the company’s prospects can inspire someone to put all—or at least too many—of their eggs in their company stock options basket.
Because it’s a large part of an investor’s total assets, any concentrated position magnifies whatever risks are inherent in that investment. And it’s important to realize that those risks may not always be obvious. Recently we’ve seen trusted, blue-chip names such as Boeing and General Electric in the news for all the wrong reasons. These were companies purchased for income stability—all-weather plays that might lose a bit along with the overall market when it dipped, then recover while continuing to issue a dividend. But bad headlines revealed that such companies held considerable stock-specific risk. And the greater their concentration in a portfolio, the more they dragged down its overall value.
One way to exchange funds for concentrated positions and lessen their impact is to establish a tax budget with a financial advisor, then work out a plan to diversify by progressively selling such investments over a period of years. This may involve looking at when it’s advantageous to sell high-cost-basis or low-cost-basis shares, and how much you can sell in a given tax year. You can then invest the proceeds of these sales in other sectors of the market. Selling shares over time also means you can maintain a certain amount of exposure, so you can benefit if the stock continues to rise. This amounts to dollar-cost-averaging out, just as dollar-cost-averaging into a position also helps you trade more shares at more favorable prices. Finally, depending on how rapidly the risk suggests you may want to reduce or exit the position, a charitable donation of shares may be an option worth considering to help minimize taxes.
In addition to divesting your portfolio of shares in the concentrated holding, a complementary strategy is to diversify money in other parts of your portfolio into investments in different sectors of the market. For example, if you held a concentrated position in Boeing, you might want to minimize other aerospace investments elsewhere in your portfolio. Perhaps you might even want to move money out of stocks altogether into another asset class.
Consulting an independent financial planner can help you take an objective look at all the components of your portfolio, including concentrated positions, in light of your individual investing goals. In addition to providing an opinion on the risk/reward merits of a stock you may like—or may have doubts about—a financial advisor can assess how that position fits into your overall financial plan. And perhaps most importantly, they can show you a simulation that quantifies the impact of a negative event such as those that struck Boeing and GE. Oftentimes, actually seeing that impact on your portfolio, and how it can derail your long-term financial plan, can be an eye-opening inducement to address a concentrated position before it causes problems.
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #10 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, How to Buy a Bond, etc., etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
The EP Wealth Advisors financial planning process starts with the relationship between you and your financial advisor. How do you value a financial coach? Developing a partnership that ensures we understand your goals lets us help you prioritize and organize your financial decisions—so you can achieve peace of mind and live your life.
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