Rhymes
I've heard the phrase “history doesn't always repeat itself, but sometimes it rhymes” a few times.
There are some significant companies going public right now. They may prove to be revolutionary, and if you have a position in them either by working there or owning shares, you may be sitting on a life-changing amount of wealth. That's an incredible position to be in.
It also reminds me of another company that once made everyone feel the same way.
I'm not comparing any of these companies to Enron from a business perspective. Enron is a cautionary tale about fraud and collapse. One of the quieter stories of that collapse wasn't the fraud itself, it was that employees had concentrated positions in company stock inside their 401(k)s at the same time it was their primary source of income. When the company collapsed, both disappeared simultaneously.
If you are an employee of one of today's high-growth companies, or simply hold a large position in a stock that has treated you very well, you need to think about concentration risk.
No matter how good a company is or appears to be, concentration can quietly become the single biggest financial vulnerability in your life. Concentration isn't a problem until it is.
When a stock is going up, a concentrated position feels like genius. The bigger it gets, the harder it becomes to consider reducing it. It's fun to watch the number go up every day, but what happens if it doesn't? How would a 30% decline affect your goals? A 50% decline? What happens if a lawsuit, a competitive threat, a technological shift, or a change in government regulation alters the future everyone assumed was inevitable? Personally, I'm usually looking hard at any single position representing more than 5% of a portfolio. That's not a universal rule. It's simply how I think about risk.
So what can you do?
Keep some. There's nothing wrong with holding a meaningful position in a company you believe in, especially one you helped build. Sentimental value is real, and sometimes the upside still is too. The goal isn't to eliminate the position, it's to size it appropriately relative to everything else you have.
Sell some, on a plan. A concentrated position doesn't have to be unwound all at once. A thoughtful sale strategy, coordinated with your income and tax situation, can reduce risk without creating one large taxable event. There are strategies worth knowing about here; exchange funds, direct indexing, and other approaches that require professional guidance. Here is the best part, you can start using some of that wealth to fund the things you actually care about!
Protect some. Depending on your circumstances, there may be strategies that help limit downside risk while you work through a longer-term diversification plan.
The specifics depend on your situation. What's true in every case is that the plan works better when it's made before the decision feels urgent. This isn't tax advice or financial planning advice. It's simply an observation from someone who has watched the same story play out more than once.
The companies change.
The technology changes.
Human behavior rarely does.