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Just like most things in life, too much of a good thing can sometimes be bad for you.

The good news is, you have been acknowledged as a leader and a contributor within your organization. As a result, you have accumulated a significant amount of equity incentives. Due to your Associate Stock Purchase Program, Restricted Stock, Stock Options, Phantom Stock, Stock Appreciation Rights, and/or your retirement plan Employer Match consisting purely of employer stock, you now find your investment portfolio dangerously overweight in company stock. Given your primary source of income is also attributable to your employer, it might be time to consider a few strategies for lightening the load and diversifying your holdings to a less risky level. But where do you begin?

Step One: Define the Problem

Let’s start with the basic premise that it isn’t safe to put all your investment eggs into one basket.  Studies have shown time and again that individual stocks are more susceptible to volatility, underperformance and potential loss than a well-diversified basket of securities. Historically, a properly diversified portfolio, aligned with the investor’s goals, risk tolerance, and time horizon, has proven to be less volatile, while still providing reasonable returns. When a single stock represents a significant portion of your portfolio’s overall value, the portfolio is, by definition, not well-diversified. This scenario can often lead to an investor taking on higher risk without a guarantee of higher returns. If you don’t expect to get compensated for the additional risk, there really isn’t any reason to accept it.  We only need to consider the likes of Lehman Brothers, Circuit City, Freddie Mac, Kodak, Office Depot, Countrywide Financial, Sprint Nextel, Sears, Enron, Worldcom, and J.C. Penney to realize that even large, well-known companies can struggle and ultimately have a catastrophic impact on one’s net worth.

So, what is “over-concentration”?  This is a great question and somewhat open to debate. There does not seem to be a general consensus as to exactly what constitutes too much of one specific stock in an investor’s portfolio. This is understandable given every investor is different. To answer this question, we should consider a number of factors such as the investor’s overall wealth level, the allocation of the portfolio, the investor’s needs relative to the portfolio, the investor’s time horizon, the investor’s tolerance for risk or volatility within the portfolio, income levels now and at retirement, and the types of income available.  Many would also consider whether the investor is tied to the company in other ways such as it being their current source of income and benefits.  If so, the investor has that much more to lose if the company fails and/or the stock tanks.

Step Two: Set a Realistic Goal

Everyone’s financial situation is different. It is important to set realistic goals relative to your starting point. Shedding a 25% position within a $10,000 portfolio isn’t the same as dropping 25% from a $10,000,000 portfolio.

In light of your circumstances, what do you want to achieve?  How much company stock do you have and how much do you want to shed? Some would make the case that with all the low cost, highly diversified investment options available, holding anything more than one or two percent of your portfolio in a given stock would be considered excessive. However, since most experts would agree that anything over ten percent is likely to increase the overall risk of the portfolio without adding much in the way of expected return, let’s assume that ten percent would be a reasonable goal to shoot for. Is it ideal for everyone? Probably not. But even in a worst-case scenario, a ten percent drop in portfolio value due to one holding should not cause irreparable damage over the long-term.

Don’t forget to set a time frame for achieving your goal. Sometimes it isn’t possible to reduce your holdings due to specific company or plan policies. And sometimes it isn’t feasible to do so quickly due to potential tax liabilities. Whatever the case may be, consider the circumstances and determine a suitable time-frame for hitting your goal.

Step Three: “Weigh” Your Options (pun intended)

Investors wishing to diversify concentrated equity holdings have several options. Some of the more commonly considered options are:

  • Re-Allocate or Liquidate – This option is the clear choice if a significant portion of your company stock holdings are