Concentrated Stock: Why A Client Fired Me

5/05/2023

Charles Luong, ChFEBC℠

About six years ago, I was meeting with a prospective client who intended to retire very soon. As I started to learn more about their personal finances, it was very apparent this people had done a wonderful job saving prudently and living within their means.They had accumulated a large retirement portfolio and had nice income streams to where they wouldn’t need to rely on their investments. I quickly learned that the entirety of their retirement account balance was invested in the stock of the company they worked for. The company stock had performed very well. It had outperformed the US Stock Market by several percentage points annually over the prior 30 years, which is a rare feat.

The Recommendation

Many people are aware that having all of your eggs in one basket is risky. However, good performance can manipulate one into thinking there is no need to diversify. This person was conscious of the risks, so they were not surprised when I recommended diversifying immediately to eliminate this company-specific risk. I proposed a portfolio comprising low-expense, broadly diversified, passively managed funds. This approach to investing has been validated repeatedly and allows one to ignore the noise that day-to-day markets bring, while historically still generating a return well in excess of inflation. They were in agreement with the plan and we moved forward with diversifying 95% of their money out of company stock into my recommendation.

The Problem

The portfolio we invested in did pretty well over the next 1-2 years, resulting in a respectable gain.The client didn't notice that.What the client noticed was the company stock we diversified out of had nearly doubled since we sold it, and they were distraught by what they "could have had". They didn't need their account to double to retire successfully, but the pain of knowing it could have had a great impact on them.

How It Ended

At first, the client voiced their frustrations about the missed gains. We spoke through it, and I reiterated the fact that we made the right decision, we just don't like the short-term outcome.This client started bringing up the topic of their "missed gains" every time I spoke with them. I knew the end of our work together was near. They were blaming me, and not too long after they moved their accounts elsewhere.If I had a do over, I would have done everything the exact same way. It was the right advice.Great decisions have poor outcomes all the time, and vice versa. Imagine you are about to retire and take your life savings to the roulette table to bet on red. That is a reckless and poor decision. If it lands on red does it mean it was a good idea? No. It was a terrible idea that paid off.Author, Annie Duke, likes to remind people that if we are judging our decisions solely on their outcomes then we are falling victim to the resulting bias ("Monday Morning Quarterback"). The quality of a decision is not based solely on the outcome.

Fiduciary Duty

It is the duty of a fee-only financial planner to act in the best interests of the clients at ALL times.Imagine the alternative scenario, having a financial planner look everything over and said, "I noticed you have your entire nest egg in one company, and I think that is a wonderful idea, don't change a thing", and then the company went bankrupt. Certainly, the planner would be blamed for ruining someone's retirement. Would they be able to stand in court and suggest they were acting in the client's best interests with that advice? No.

The Last Laugh?

Whether or not the client bought back the stock after terminating my services, I do not know. What I do know is that the company started having major problems, and the stock price fell nearly 80% shortly after the client and I parted ways. Today, it is still down over 50% from its peak.The well-diversified portfolio I had constructed would have continued to show respectable gains over the full timeframe, of course not without hiccups along the way.I never would have predicted such a thing would happen, as I do not know what the future holds for any company's stock. I know the market in aggregate, has rewarded diversified, patient investors, and I have no reason to believe that will be different moving forward.

The Great Stock Graveyard

The stock graveyard is littered with the once-upon-a-time great performers and many iconic brands. Here's a short list of large companies that experienced a 100% stock loss:

• Sears
• Enron
• General Motors
• Worldcom
• Chrysler
• Lehman Brothers
• Silicon Valley Bank
• Washington Mutual
• Pacific Gas
• CIT Group
• MF Global

The list goes on and on, but there is an even more extensive list of companies that fell from their peak and never returned. As recently as 2013, Nokia sold 200 million phones (about 36 million more than the iPhone that year). Where is Nokia now? Risk comes at you quickly.

Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Endeavor Advisors deems to be reliable. Consult with a financial advisor before implementing any strategies. The facts of the above-mentioned client story have been altered to protect their identity.