Ed Snyder, CFP®, ChFC
Over the last year, Eli Lilly stock has increased 48% from $80 a share to $117 a share. That means a lot of people have a lot more money in Lilly stock than they did a year ago. It also means it’s a good time to assess your portfolio and see how much Lilly stock you own. It’s risky to hold more than 5-10% in the stock of the company you work for because you have two things at risk – your investments and your job. It’s important to diversify by selling some of the stock and investing it in a mix of other investments to reduce your risk.
While it’s important to diversify, it can be hard to convince yourself to diversify. You’re usually thinking about how well the company is doing and what you think about its future prospects. But even the best companies experience problems. GE was the world’s most valuable company 15 years ago. Its stock has fallen 80% since it hit highs in 2000.
Often people don’t realize how much they have in Lilly stock. Consider stock you own in your 401(k), IRAs, and brokerage accounts. If you’re buying it in your 401(k) and you’re receiving more stock every year from Restricted Stock Units and Performance Units, it can begin to add up. And as the stock price increases, your exposure can also increase. So, you can get this snowball effect of receiving more shares every year plus the stock price increasing and before you know it, your company stock that was 20% of your portfolio is 25% next year and 33% the year after that.
Why is this risky?
It’s risky to have too much money concentrated in any one stock because any company can be impacted by any number of factors that could make the stock price drop. And the drop may be less of a drop, and more of a slow decline. For example, Lilly stock was in the $80 – $100 range in 2000-2001 and just kind of went sideways and down over the next nine years to $29 in 2009. This was a prolonged period of challenge for the stock and not every period is like that. To the contrary, from 2009 until now the stock has experienced much success. One of the challenges is that, as we sit here today, we don’t know which era we are in. So, it’s good to own some of the stock to participate in its successes, but not to own so much of it that it has a significant negative impact on your overall portfolio when the stock goes through its inevitable challenges.
The larger the percentage of company stock, the more risk there is. And as quickly as the snowball effect I mentioned earlier can end up with you accumulating more and more shares, the snowball effect of a declining stock price and not being aware of how large of a percentage of company stock you own, and/or not addressing it can lead to significant declines in account values.
What do I do about it?
Reducing single stock exposure can be complicated by tax consequences, legal constraints on your ability to sell, trading windows, and stock ownership requirements, among other things. It can be an emotional process, as people have generally developed a loyalty to the company, as well as worrying about missing out on possible future price appreciation.
The choices available to diversify out of concentrated stock will depend on your circumstances and tax considerations. It’s important to take your time and have a well-thought-out strategy.
We’re here if you have questions.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.