Why Holding Too Much of One Stock Can Be Dangerous for Investors
By Laurie Allen, CFP® | LA Wealth Management
As a financial advisor, I frequently work with clients who have significant exposure to a single stock—often due to employee compensation in company stock or inheritance from a family member. While concentrated positions can be lucrative when a stock performs well, they can also be extremely risky. Even seemingly stable companies can face unexpected downturns, regulatory challenges, or catastrophic events that drastically reduce their value. In this article, we will explore why holding too much of one stock can be dangerous by examining real-world examples of companies that were once considered reliable but faced severe declines, sometimes to the point of bankruptcy.
The Risk of Over-Concentration
For many high-earning professionals and executives, holding a large portion of their net worth in one company’s stock is common, especially if they receive stock-based compensation. However, over-concentration in a single stock means that a substantial portion of an investor’s portfolio is tied to the fortunes of one company. This can be particularly risky because:
Company-Specific Risk: Factors unique to the company, like management decisions or product failures, can heavily impact its value.
Industry Risk: Changes in industry conditions or technological disruption can harm a single company while sparing others.
Market Sentiment: Even strong companies can suffer significant losses due to changing investor sentiment or macroeconomic factors.
Financial or Operational Failures: Bankruptcy, fraud, or legal issues can cause sudden and irreversible losses.
Case Studies: Real-Life Examples of Single-Stock Risk
General Motors (2009) Once a symbol of American industrial power, GM declared bankruptcy in 2009 during the Great Recession. Stockholders saw their shares, which traded at around $60 in the early 2000s, become worthless when the company restructured. For those who received GM stock as part of their compensation or inherited shares from family members, the losses were devastating.
Washington Mutual (2008) Washington Mutual was one of the largest savings and loan associations in the United States. During the 2008 financial crisis, it collapsed under the weight of bad mortgage investments, and shareholders were completely wiped out. Those who inherited a large amount of WaMu stock or held it for its dividend income faced catastrophic financial losses.
General Electric (2000s) GE was once one of the most valuable and trusted companies in the world. However, poor strategic decisions, especially in finance and energy, caused the stock to plummet from around $60 in 2000 to under $10 in the 2010s. Many executives and long-time employees held large positions in GE stock, assuming it was a safe bet, only to see their wealth erode over time.
American Airlines (2011) American Airlines filed for bankruptcy in 2011 after struggling with high labor costs and mounting debt. The stock, once considered a blue-chip investment, became essentially worthless. Though it eventually re-emerged, employees who received American Airlines stock as part of their compensation lost significant value.
Boeing (2019-2020) Boeing’s reputation as a reliable blue-chip stock took a severe hit after two fatal crashes involving the 737 MAX led to production halts and regulatory scrutiny. Coupled with the COVID-19 pandemic, Boeing’s stock fell from over $400 to around $100. Employees who held large amounts of Boeing stock as part of their compensation or retirement savings faced considerable losses.
AT&T (2010s to 2020s) AT&T made a series of poor acquisition decisions, including DirecTV and Time Warner, resulting in massive debt and stock devaluation. The stock price, which peaked around $40, fell to under $20, and dividends were cut. Employees and retirees who depended on the stock for dividend income were particularly impacted.
How to Mitigate Single-Stock Risk
Diversify Your Portfolio: Holding a variety of stocks from different industries can reduce the impact of a single company’s failure.
Regular Portfolio Rebalancing: Continuously monitor and adjust your portfolio to avoid concentration as individual stocks grow disproportionately.
Set Maximum Exposure Limits: Limit any single stock to a small percentage of your overall portfolio.
Consider Hedging Strategies: Options or inverse ETFs can protect against declines in a stock where you have significant exposure.
Final Thoughts
Working with clients who have concentrated stock positions, I always emphasize the importance of diversification and risk management. Even companies that seem stable and profitable can encounter challenges that dramatically affect their stock value. By taking proactive steps to manage single-stock risk, you can protect your financial future and achieve a more resilient investment portfolio.
Disclosures:
*Diversification does not guarantee a profit or protect against a loss in a declining market
*These historical examples are provided for illustrative purposes only and are not indicative of future results. The circumstances described were unique and may not reflect current conditions or outcomes for other companies.
*This article is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Please consult your financial advisor before making any investment decisions.
Sources: https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization?utm_source=chatgpt.com
https://www.morningstar.com/stocks/5-charts-general-electrics-fall-grace?utm_source=chatgpt.com
https://www.fool.com/investing/2021/05/19/an-att-dividend-cut-is-coming-buy-this-telecom-ins/?utm_source=chatgpt.com