Something that all investors need to keep in mind is that just because a company has been a solid performer for a long time, doesn’t mean it will be forever. This rings true for the many investors in General Electric. The company was founded 125 years ago and is the only original company still listed on the Dow Jones Industrial Average index.
GE has had a rough year to say the least. The stock is down more than 55% year to date. For many long-term investors, GE has been a staple in their portfolio because of the company’s dividend; however, the company announced on Nov. 13 that they would be cutting their dividend by 50%, down to $0.12 a share per quarter.
This is a perfect example of why we have the investment philosophy and strategy that we do. If an investor needs income, we recommend that money be placed in fixed-income investments that mature when the money is needed to shield from the volatility of the market. We also recommend that no one stock compose more than 10% of your overall portfolio. Ideally, we’d prefer to keep a single concentration down to less than 5%.
We had an opportunity to look at an investor’s portfolio recently. This investor has more than 25% of his entire portfolio in GE stock. The stock was acquired throughout the years through investments, reinvestment of dividends, inheritance, etc. This investor’s portfolio is only up 3% for the year, despite the S&P 500 Index benchmark being up more than 15%. Excluding GE, the investor’s otherwise diversified portfolio would be up nearly 18%. This illustrates the damage a highly concentrated position can have on your investments.
One of the main reasons investors don’t want to sell out of a highly concentrated position is that they do not want to pay the capital gains. Surprisingly enough, these same investors often do not want to sell certain stocks because they have a loss. It is human nature to think this way, but you need to remember you’re invested to make money—not break even. In reality, you want to owe a lot of tax on your investment portfolio because that means you’re making a lot of money.
Other reasons investors stay with a losing stock can be explained with Behavioral Finance, the study of emotional and psychological factors on an investor’s decisions. Investors will hang on to a stock because they believe it cannot continue to fall. They believe because it has been around 125 years, it will be around 125 more. They may also have an emotional attachment to the stock because they worked for the company or they inherited the stock from their family. And then there are the investors who ignore the fluctuations in price because the company pays a dividend. Unfortunately for them, GE just proved that a dividend is not guaranteed.
Despite GE’s performance and the drag it can have on a portfolio, some long-term investors who still hold GE may still have gains. If this is your situation with a highly concentrated position, we recommend you work with a trusted financial adviser and tax expert to identify specific lots of the stock to sell that have losses. Then start trimming the rest of the position down, by rebalancing your portfolio. You may be able to use other losses to offset the gains in a highly concentrated position. Ideally, you want a well-diversified portfolio, as many of the market sectors are negatively correlated, meaning when one goes down the other goes up.
The stock market is inherently volatile, and you never know when companies may cut their dividend. This is why we believe it is so important to protect the money you need to cover your spending needs. If you have questions on the diversification of your assets, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
