Last Updated: July 17, 2019

We recently met with a couple, Joan and Steve. They are both in their early 60s and planning to retire in the next few years. Our team sat down with them to review their portfolio and help prepare their financial plan for retirement. The couple held a significant portion of their wealth in a single technology stock, which they bought over 15 years ago. As you can imagine, they had a substantial gain in the stock and any selling would result in a large tax bill. While no one likes to pay capital gain taxes, Joan and Steve had not yet considered two key risks associated with holding such a large position: time and volatility.

We discussed the couple’s goals and the importance of reducing the volatility of their portfolio over the next several years. For retirees relying on their portfolio to fund their lifestyle, volatility is their greatest enemy. We reminded them about the negative effect the financial crisis had on retirees only a decade ago. We reviewed their large position in the technology stock and they were surprised to learn that, in just the last few years, there had been a significant correction in the stock price. In 2015, the stock peaked at $140 but declined 40% over the next 15 months, and it took another full year for the price to recover back above $140.

Joan and Steve realized that another drop of a comparable magnitude in the company’s stock price at this point in their lives could produce a significant decline in the overall value of their portfolio. Even if the share price recovered from such a drop, it could take several years for that to happen – if that fast or if at all. For example, many retirees are still waiting for the former Blue Chip company, GE, to recover.

We explained to Joan and Steve how this risk of volatility could affect their lifestyle. We talked with them about how much cash flow they would need each year in retirement. We discussed with them that cash flow is not merely “income,” that is, simply dividends and interest. Rather it can come from gains in the value of their portfolio, whether realized or not. In this respect, their unusually large concentration in this particular stock raised a risk that a significant decline in price could lower the value on the base on which a safe withdrawal rate could be calculated. We call that safe rate a Sustainable Draw Rate. In particular, another significant decline in the price of a large holding could require the couple to sell the stock at unattractive prices in order to meet their cash flow needs.

Joan and Steve realized their portfolio was creating unnecessary risks and being “held hostage” to the performance of one holding. We advised against having such an overweight position in their portfolio, no matter how strong the long-term potential for the technology stock (or any company) might appear at the moment. We recommended a plan that included reducing their concentrated position in the stock through a schedule of regular sales and reinvestment of those proceeds over a pre-determined period to ensure a balanced and diversified portfolio.

As a result, their portfolio is now much better aligned with their goals – delivering both the steady cash flow and peace of mind to focus their time on what matters most to them in life. And they are now excited for their retirement.

IMPORTANT DISCLOSURE INFORMATION The opinions expressed in this video are solely the opinions of Segall Bryant & Hamill. You should not treat any opinion in this video as specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager's opinions. The opinions expressed in this video are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this video does not constitute financial, legal, tax, or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager's opinions are statements are subject to change without notice and Segall Bryant & Hamill is not obligated to update or correct any information in this video. For illustrative purposes only. Segall Bryant & Hamill does not provide accounting, legal or tax advice. This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax or investment advice.