It’s not uncommon for investors to hold a large amount of one company’s stock. Maybe it’s from years of working at the company, an inheritance, or simply strong performance over time.

Colin Randall

While it may feel good to see so much value tied to one name, concentrating too heavily in a single stock can be risky.

If most of your wealth depends on one company, your financial future rises and falls with its fortunes.

Even the strongest companies can face setbacks, and one bad earnings report or market shift could wipe out years of gains. Single stocks can swing widely in value. That volatility can create stress and make it harder to stay disciplined during market turbulence.

Often times, there is a personal connection to the concentrated position that can skew your confidence in its performance. This could be company stock or even a position that you have held for a long time and you feel like it has always had a great performance. However, circumstances can change quickly.

The Global Financial Crisis was a primary example of that. Lehman Brothers was a prominent investment bank whose stock traded at over $300 in 2007 only to declare bankruptcy in September 2008.

When I worked on Wall Street for Barclays Capital, who later purchased the assets of Lehman Brothers, I heard countless stories from former Lehman employees who had millions of dollars in company stock a year before that became worthless.

Circumstances can often limit the ability to sell certain positions and diversify. Company stock that is granted as compensation is typically restricted, meaning you cannot sell it for a certain period (typically years).

There may also be significant unrealized gains on the position so there would be a hefty tax bill associated with any sale. Situations may make it difficult to unwind these concentrated positions, but balancing the risk is an important consideration.

Even some of the best companies in the world at any given time can face unexpected hardships.

Enron, WorldCom and Theranos were laden with fraud. Eastman Kodak and Toys-R-Us couldn’t keep pace with new competition.

It is important not to be overconfident in any particular asset. Your financial goals depend on it.

Collin Randall, CFA, CFP, is a financial adviser at Randall & Associates Wealth Management, with offices in Butler and Warrendale. Randall & Associates is a registered investment adviser and does not provide any legal, accounting or tax advice. The material prepared is the opinion of the author and for informational purposes.