Updated: May 24, 2021
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Dave and Dana learned how to confront their fears and cut their emotional ties to under-performing assets.
 
Key Takeaways    

• Letting go can be difficult, whether it comes to long held clothes, sports teams or even financial assets.

• Even well-known “blue chip” stocks may not be worth holding onto if their characteristics do not align with your financial plan and life stage. Don’t keep kicking the tax can down the road.

• Concentrating the majority of your wealth into just a small number of stocks is not showing loyalty to those companies--it’s simply increasing your portfolio risk.

• A couple learned to embrace market corrections as an opportunity to diversify—not to duck and cover.

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The Usual Suspect. No, we are not talking about the hit movie from 1996 (written by local writer Christopher McQuarrie). We are talking clients who came to us with having owned nothing but the same 15 to 20 stocks for decades. Many may call them “blue chips,” but we prefer to call them the “usual suspects.”
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The Situation

Like many successful couples, Dave and Dana had been holding the same dozen-and-a-half “blue chip” stocks for years—through a combination of long-forgotten purchases and inheritances.
 
Like many couples, Dave and Dana were reluctant to part with their “suspect” stocks because they had always been told they were good solid companies. Like many of our clients, Dave and Dana started developing a sentimental value attachment to their long-held stocks. However, the couple’s “blue chip” portfolio had been underperforming the overall market but selling their shares—in whole or in part--would result in a large capital gains tax bill.

Not surprisingly, they’re unsure about what to do. However, procrastination and inertia rarely result in a positive outcome.
 
Indecision about long-held investments gets even more stressful in times of stock market volatility like we experienced at outset of Covid and the 2020 elections. Just remember that a drop in the stock market is not a threat to your financial security--it’s a great opportunity to rebalance your portfolio or diversify it further with little or no tax consequences.
 
Our approach to investing is summarized by three principles:
 

1. Strategy.

2. Process.

3. Managing Behavior.

Concentrating the majority of your wealth into just a small number of stocks is not showing loyalty to those companies, it’s just dramatically increasing your portfolio risk in the hope of a high return.

As the old saying goes: “Hope is not a strategy.”

By investing only in what is familiar and by simply “buying and holding,” Dave and Dana were unwittingly engaging in “concentration risk.” This usually results in a lack of diversification and a misalignment of risk tolerance and financial goals.
 
As mentioned earlier, we helped Dave and Dana understand how market drops are not “bullets” to avoid, but opportunities to diversify. We also helped them understand why it’s so dangerous to keep holding on to stocks you’ve profited from just to avoid paying taxes.  

Had they come to us before the 2008 global financial crisis, they could have avoided a situation in which their over-concentrated stock positions caused them to lose much more in the stock market drop that year than they would have if they just paid taxes and diversified.
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The Solution

Our strategy was to develop a target allocation of stock and bonds for Dave and Dana that was consistent with their risk tolerance and goals. Then we followed a process to diversify their portfolio gradually by using a variety of tax management strategies.

Going forward, managing behavior is key, especially as it relates to individual stock holdings. Many people succumb to “familiarity bias” when it comes to investing. They become familiar with an investment and convince themselves it is less risky. We help our clients manage these costly behaviors bias and help them make rational decisions without emotion getting in the way.
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Ultimately, the structure of your investments determines its performance. There are five decisions you need to make when developing an investment strategy. These decisions determine how much money you will earn and how big your ups and downs will be from year to year:
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1. What percentage of your assets do you have in stocks and in bonds?

2. Are your stocks in large or small companies?

3. Are your stocks low-priced value stocks or higher-priced growth stocks?

4. Are your bonds short-term or long-term?

5. Are your bonds high quality or low quality?

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We help our clients determine the answers to these questions and then implement solutions to help them achieve the highest probability of success for realizing their goals.
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Conclusion

​Separation anxiety is difficult in any type of relationship. If you or someone close to you has concerns about their retirement readiness, portfolio allocation or relationship with money, please don’t hesitate to reach out.