Many investors end up with a huge position in just one stock.
This is a “good problem” that often happens with older investors, in particular.
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Is It Bad to Hold One Stock for a Long Time?
It’s risky to have too much net worth tied up into one stock, period.
It’s true that concentrated positions in a few good stocks can and sometimes do result in higher returns but buying and holding only one stock position is just too risky.
Diversification through asset allocation is an easy way to lower risk. And diversification is missing when an investor has an extremely high allocation of wealth into one stock.
Plus, investing such a high percentage of net worth into one company often leads to stress about investing. While on the surface it can feel great to have a large position in a company you like, most investors know deep down it’s risky to have so much of their retirement savings tied up in only one stock.
Yet investors often still struggle selling shares of long time stock positions that have made wealth for them.
In fact, one large stock position can be the sole investment that turns a beginner investor into a millionaire over time.
In such situations, investor emotions usually come into play since it’s easy to fall in love with an asset that built wealth easily for you, even when it has taken a long time and there was extra risk along the way.
If you have a single large stock position you’re not alone; falling in love with long term holdings is very common with buy and hold investors that experience success.
Why Hold Large Positions in One Stock?
Some of my financial coaching clients have been older investors that have held single stock positions for one or more decades.
This has often happened somewhat unintentionally over time. A large position in just one stock often results from years if not decades of employee benefits in the form of stock options or company stock.
Also, the number of shares such investors hold has usually been multiplied by recurring stock splits over the years. When investors get shares from stock splits, it can feel like the shares are free even though they still own the same amount of equity in the company.
Other times I’ve seen investors so enamored with one company that they only want to invest their money in it. This tends to happen when there is an iconic leader, such as Elon Musk.
Selling Covered Calls on a Buy and Hold Stock Position
Sometimes selling out of the money covered calls can make sense for investors that refuse to sell large long term buy and hold stock positions.
Selling out of the money covered calls can result in continuing to hold the stocks long term while generating investment income that’s much higher than dividend income.
A covered call strategy can actually lower stock risk by offsetting the stock’s cost each month while also providing significant income from an otherwise low yield asset.
Of course covered calls have problems, too, particularly if a large stock position gets exercised at a strike price less than the investor wanted. This can even result in an undesired capital gain in a taxable account if the large position is held outside a retirement account.
If it appears an undesirable exercise might occur, the covered calls can be rolled up and out, however.
Large Single Stock Position Summary
Holding too much investment capital on one stock position is risky. There are just too many things that can happen to a company.
My rule of thumb is to never have any investment allocation that would result in serious damage to our financial situation if it suffered a large decline.
Because, well, large and even complete declines happen sometimes.
