Evaluating Alternatives & Managing Risk
Many individuals often have a significant percentage of their net worth invested to a single stock.
Unfortunately, as one thinks about retirement, a concentrated portfolio will likely fluctuate more than a diversified portfolio.
Unless there is a stable source of regular income, retirees are generally uncomfortable with significant portfolio fluctuations. One particular challenge with concentrated holdings is when they are in taxable account(s) and cannot be sold without incurring significant capital gains taxes. What is an investor to do?
There is no “magic” answer that works in each situation. The solution depends on your specific facts and circumstances and should be evaluated in terms of the impact on your overall financial plan. Often times, using a combination approach — over a multi-year period — is an appropriate solution. Here are some strategies that may be able to reduce portfolio fluctuations:
- Hedging strategies that would limit the downside risk but would likely put a limit on the upside reward.
- Go short investment(s) that tend to move in the opposite direction of your stock.
- Use a variable pre-paid forward.
- Periodically sell some holdings.
- Donate to charity and/or a charitable remainder trust
Working with your other professional advisors, JIC will evaluate the impact an individual or combination of alternative strategies may have on achieving your financial goals.