How much of any one security position should you hold? In the last couple of weeks, we have all watched significant volatility in capital markets. Regardless of the causative factors, large institutional investors have sought to best align their portfolios for major risk management specifically developed for these circumstances.

Investment allocation decisions dictated by prudent investment policy guidelines are routinely taken by investment managers — barring those who have been forced to redeem for liquidity reasons or to unwind disadvantaged securities positions. Institutional asset allocation guidelines provide specific security position percentage ranges in order to minimise risk exposure and volatility.

Individual investors, who often own a smorgasbord of investments that include single concentrated stock positions may not understand the consequences of their choices until capital markets deteriorate.

Holding concentrated stock positions can exacerbate investor anxiety.

A concentrated stock position(s) means that a significant portion of your total portfolio is dependent upon the success (or failure) of a few (or just one) equity position. The effect of a market downturn on the value of your single position can have a dramatic negative effect on your entire portfolio. The inability to redeem portions of a single holding at a fair value in volatile markets is an additional liquidity damper. Former Enron employees know only too well what it means when everyone wants to sell the same stock and there are no buyers.

How does anyone end up with concentrated stock?

It can be awarded by an employer in the form of restricted stock, stock options, or obtained under a discounted stock purchase plan. Single stock ownership can arise from just one company, one industry, or one country. Stock is also used as an incentive for over-the-top job performance; or, as nylon handcuffs given in lieu of a real cash bonus in order to keep you happy and on the job (and save the company some cash float).

Often, a significant chunk of your company stock is plunked into your retirement plan, although that is less frequent today if prudent fiduciary practices are adhered to. Other significant concentrations occur with legacy shares inherited from long ago, as well as retirees misplaced allegiances to companies that have completely changed from within (and without).

Emotional, physical and identity attachments. It is not easy to admit that as a qualified financial planner, there have been very few successes when it comes to encouraging a client to reduce a potential concentrated stock disaster. It is so difficult for the owner to remove the emotional connection to an intangible asset. Here are some examples:

• "You don't understand. I know this company; it has been good to me and I have lots of friends there." Overwhelmingly, this is the first reason I hear when we recommend a lightening of concentration effect. Thus, said an individual retiring in a three-month time frame. Six months later, the company stock tanked by 40 percent. It took two years of pure anxiety (and lots of scrimping expenses by the retiree) before the value returned to the same level. And the retiree had no idea the company senior management was involved in fraud.

• "You just want to me to give you my money so you can sell me some product of yours and make a big fat commission!" This reason clients are often too polite to express, but I can see it in their body language. Far too many financial representatives over the years have done just that, and the client has lost faith in (and no longer trusts) the entire investment industry.

• "My grandfather left me these and I will never sell them." That's OK, soon you can just throw those worthless share certificates away, because this company is on its way out. The competition has completely dominated that market. Well, AT&T was on its way out, too, but their turnaround is an exception.

• "If I sell, I feel like I am betraying my colleagues and employers." Isn't it funny? We never read those statements from the executives of Enron, or other executives who have recently departed some of the not-so sublime sub-prime mortgage companies. They just made their employees redundant.

These are just a few of the many vignettes experienced over the last 20 years of practice.

There are just as many reasons, certainly more legitimate, that you should avoid this concentration.

• Significant volatility triggers investor emotional distress.

• Permanent loss of share value from underlying company personnel committing fraud.

• Increased competition in the marketplace generates product obsolescence. Does anyone remember the value of Yahoo after the IPO?

• Mergers and acquisitions drive the company into bankruptcy.

Highly successful pension plan managers for companies, as well as foundations, endowments and the like have regulatory limits for company stock. Learn from what they know, they've been managing money expertly for years.

What is an appropriate percentage of one security position to own? No more than 10 percent, and certainly, you should be monitoring your portfolio closely if positions exceed that limit. Allowing the percentage to climb to 20 percent or higher is placing your long-term and short-term financial security at risk.

We, in the investment sector sound like broken records with our constant talk about diversification, diversification, diversification. There are solid empirically documented reasons that portfolios with broad global diversification will weather market volatility while reducing unsystemic risk.

It is a recommendation we repeat again and again. It is also depressing to see the same abrupt devaluation in concentrated positions again and again.

None of this discourse means that the value of your concentrated positions will stay in the dumpster permanently. But, if you choose to ignore the warnings and actual experiences of many who did not diversify, can you survive the emotional turmoil of waiting for your favourite company stock share value to rise, knowing that if it does not, you have just made a terrible decision to retire before your time?

Martha Harris Myron CPA-NH#1929 CFP®#67184 is a Senior Wealth Manager at Argus Financial Limited specializing in investment advisory services focused on capital preservation and comprehensive financial solutions for clients considering lifestyle transitions and rewarding retirements. Confidential email can be directed to marthamyron@northrock.bm or 294-5709 CFP®, CERTIFIED FINANCIAL PLANNER®, and are certification marks owned in the US by Certified Financial Planner Board of Standards Inc. (CFP Board) and outside the United States by Financial Planning Standards Board Ltd. (FPSB).

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific investment, legal, tax or financial planning advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.