The ‘Fat Cats’ keep the money - who is left holding the bag?
Friday, 3 October 2008
Whilst some of the so called Fat Cats will still have their homes in the Hamptons, New York and Notting Hill, London, the casualties of the current crisis are the workers. For example, you maybe in a senior position with a bank and have seen the shares you own plummet. Unfortunately, some will have not only lost their job but have seen their shares wiped out?
Regardless of how you acquired your shares, however, by maintaining a concentrated stock position, you are taking an unnecessary risk with your financial future.
It is important for individuals with stock options or concentrated positions with a large number of shares in their company review these positions.
So how do you know if a concentrated stock position is an issue for you? Here are some warning signs:
•You have 20-30% or more of your net worth invested in one company.
•Your holding has outpaced the market by a wide margin.
•Your stock has begun to under perform in the market.
•Your stock has large, volatile swings in price.
It is fair to say that any, or all, of these warnings can be a signal to you to diversify. But what kind of plan do you need for that diversification, and how should the plan be implemented? First, you will need to honestly assess your appetite for risk and get in touch with how diversification can reduce that risk.
You will find it helpful to model several scenarios and look at how different mixes of stocks, bonds, and cash - even private equity and property—have performed historically. This is something Murray Round can help you with.
When you have selected a target asset allocation, then you can choose a method for diversifying out of the concentrated position. While there are many ways to reduce exposure to a concentrated stock position, often the simplest solution—an outright sale of the stock—makes a lot of sense. A sale achieves diversification immediately, and the cost of implementation is extremely low. Also, you receive your proceeds in cash, which leaves you free to select and take advantage of any investment program you see fit. The downside of this decision is that capital gains taxes—typically 18% of the profit will be assessed on the sale. However, if the stock in question is particularly volatile, paying this tax may well be the lesser of two evils; you will want to weigh your stock's downside potential against the tax liability to be incurred when you sell.
The key issue is diversification.
To help reduce the tax, it may be attractive to make a pension contribution and then diversify holdings within the pension fund. Whatever method you consider, remaining focused on the diversification process is essential to building a risk managed portfolio.
Categories: Asset Class Management, Diversification, Risk
posted by Murray Round Wealth Management @ 16:06,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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