the case for diversification
What Has Gone to the Wayside in the SVB Conversation
The collapse of Silicon Valley Bank (SVB) has caused many Americans to reconsider where they keep their hard-earned dollars on deposit. And for good reason since SVB, formerly the country’s 16th largest bank, surely seemed an unlikely candidate for insolvency. But what nobody seems to be talking about—after surveying the widespread fallout—is how detrimental stock concentrations can be to your investment portfolio. Allow me to explain.
SVB Financial Group (ticker SIVBQ) is parent company to SVB and on March 9th of 2023, its stock price plunged from 267 to 106—a decline of over 60%. If you had $100k invested in SIVBQ it would have turned into $40k; $1M would have turned into $400k—in a single trading day. As of the writing of this blog, SIVBQ is trading at just sixty cents per share. Now you might be thinking, those numbers are staggering but who actually puts that much money into one company? Working as a financial advisor allows me a unique perspective into the lives of many different investors. From that vantage point, I can tell you that stock concentrations are far more common than you might think. In fact, you might own one (or more) in your own portfolio right now!
Financial experts identify a stock concentration as any single stock holding a 10% or greater position in your total portfolio. This could happen slowly over time through employer incentives like Restricted Stock Units (RSUs) and/or Employee Stock Purchase Plans (ESPP); or, relatively fast through consistent surges in stock price (consider Amazon or Tesla during major growth cycles). Perhaps you inherited some stock(s) from a passing parent or worked for a startup that had a successful Initial Public Offering (IPO). The possibilities are many but the net effect on your portfolio is the same: stock concentrations create unreasonable and unnecessary financial risk.
So how can you divest from a stock concentration if you realize you have one? The first step is removing any emotional tie you have to the company. This can be easier said than done if you’re an employee of the company and believe in the product or service, loved the person who bequeathed you the shares, or have seen one of your picks perform really well over time—after all, nobody likes selling a winner! But consider SIVBQ and what a reluctance to divest could end up costing you down the road. Also know that you don’t have to part ways with the company, just lower your exposure to less than 10%.
Second, recognize your tax exposure and decide when and how quickly you will divest. For some, selling all your shares in a single tax year could trigger big capital gains. Pacing yourself over multiple years or offsetting gains with losses (tax loss harvesting) are two potential strategies to temper the tax burden. Creating extra tax deductions through giving is another possibility worth considering if you’re charitably inclined. (Ask me about “stacking” and/or Donor Advised Funds)
Third, decide what you will divest into. Holding a mountain of cash in a high-inflation economy is not the wisest. Mutual Funds and ETFs offer built-in diversification and a level of professional management that individual stocks do not. Working with a reputable financial advisor who understands your unique needs is the best approach for creating a diversified and comprehensive investment strategy.
In closing, I’d like to point you to Ecclesiastes 11:1-2: “Ship your grain across the sea; after many days you may receive a return. Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” King Solomon uttered these words some 3,000 years ago but their relevance could not be truer today. None of us know what disaster lies ahead in the economy and/or stock market, and any of our portfolios could contain the next SIVBQ, Enron or FTX.* To identify and divest from stock concentrations could vastly increase your peace of mind while reducing the level of risk you’re taking in your investments. If you need help formulating an appropriate strategy, take a moment to schedule a complimentary review of your existing portfolio.
Sources
https://www.morningstar.com/stocks/pinx/sivbq/chart
https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals (*exhaustive list of corporate failures and scandals)
Advisory Services are offered through Creative Financial Designs, Inc., a Registered Investment Adviser, and Securities are offered through cfd Investments, Inc., a Registered Broker/Dealer, Member FINRA & SIPC, 2704 S. Goyer Rd., Kokomo, IN 46902. 765-453-9600. Christian Wealth Management is not affiliated with the cfd companies.