Too Much Concentration

Having too much of a good thing can be bad for your portfolio.

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Enron.

That simple, seemingly-harmless corporate moniker can send shivers through the spine of even the most seasoned investor. After the collapse, employees with Enron-heavy 401(k) plans were left with nothing.

But Enron was not unique in the fact that employees had large chunks of their 401(k) plan invested in the corporate stock of their employer. According to CNN and Money Magazine, Procter and Gamble employees have 94.65% of their 401(k) assets invested in company stock, much higher than the nearly 60% that Enron employees had.

The problem doesn’t affect just those who have company-heavy 401(k) plans.It’s a problem that plagues individual investors as well. Perhaps you have a favorite company that you love, and you’ve gradually invested more and more in it, until it has reached an unhealthy amount.

Like many other tragedies, what emerged from the disaster was a reality check for anyone who has too many of their nest eggs in one basket. And if you haven’t done so recently, it may be time to check your portfolio’s diversification.

Most experts agree that you should never invest more than 30% of your assets in one single stock and not more than 15% of your 401(k) in your employer’s stock. If you find yourself in that position, talk to a financial professional about how you can ease out of such a large commitment without giving a chunk back to Uncle Sam.

Here are a few of the potential options available to you:

Stagger your stock sales – It may seem like common sense, but by simply selling equal proportions of your stock over a period of several years, you reduce the amount of capital gains tax owed in one particular year.

Consider gifting it – If you’re feeling generous, you may consider gifting a certain amount of the stock to a child, grandchild or charity. Besides being a great gift, it helps you avoid paying capital gains taxes.

Consider individual cost basis – By carefully selecting for sale the stocks in your portfolio with the highest cost basis, you can minimize the amount of capital gains tax you have to pay.

When it comes to diversification plans, one size does not fit all. It’s important that you talk to a financial professional to create a specific, individualized plan to carefully ease all of your nest eggs out of one basket.

Diversification seeks to maximize the performance by spreading your investment dollars into various asset classes to add balance to your portfolio. However, using this methodology does not guarantee against the risk of loss in a declining market.