Concentration risk can be good, bad or very ugly

Concentration risk can be good, bad or very ugly – even more so when you add in leverage by way of a margin loan as employees at Slater & Gordon found out this week.

​I read this morning that shares in law firm Slater & Gordon fell 25% yesterday, and have fallen by more than 40% in the space of one week.  Have we not learned anything in the last five years. Clearly not. The share price of Slater & Gordon has now lost more than half its value since April and trading volumes have gone from an average of around 3 million shares a day traded to over 30 millions shares changing hands yesterday. That is an enormous change and is most certainly a result of banks and lenders making margin calls, and forcing investors to sell down at the worst possible time.

Leverage is dangerous, and none more so than leverage that involves margin lending and concentrated share portfolios.  Throughout the course of the GFC a number of professionals were caught out at investment banks as their own firms share price fell, and they received a margin call.   Don’t get me wrong, employee share schemes have some great benefits, but if you want to convert those benefits into long term opportunity for you and your family, you need to ensure that put in place a plan the allows you to slowly but surely diversify your strategy away from one stock.

Now a 40% fall in the value of one share is an issue, however what is more concerning to me is that it seems people have not learnt the lessons of the GFC.  Margin calls would not have occurred if investors didn’t have all of their eggs in one basket. Think about this for a moment.

It makes no sense to have both your income stream (your salary) and all of your investment portfolio (your shares) tied up with the one firm (your employer).  That however is what a number of these staff members in some of Australia’s largest publicly traded companies do. In short, I believe that is a massive risk and something we all need to consider for our short, medium and long term financial well being.

I personally feel that investors would be better off financially (and mentally) saying no to margin strategies and adopting the tried and true habit of dollar cost averaging into short and long term strategies.  Short term for me is all about day to day liquidity, emergency funds and holiday funds and long term is everything else. Long term is everything else, and should involve both shares and property, never either or.

So my recommendation is don’t risk your short term mental health or your long term future by putting all your eggs in the one basket. It’s just not worth it people.

If you get the feeling that you might needs some help, or a second opinion, come on in and chat to one of our team about our advice programs for those with employee share schemes, you will be glad you did.

It’s my job to work as my client’s financial ‘lifesaver’ to ensure that they swim between the flags and that they don’t get in over their heads.