By Mike Gibbons, RICP®
For Abbott and AbbVie employees, owning company stock is as routine as brushing your teeth in the morning. Not only is Abbott a dominant player in the stock market, but equity compensation is a huge component of your benefits package as an employee. But how much is too much Abbott/AbbVie stock to own? When does an equity position go from standard to overly concentrated, and how can you keep your portfolio safe?
As with most financial questions, there is no cookie-cutter answer. However, we do know that concentrated investment in individual securities carries increased risk. Let’s see why.
The Risks of Investing in Any Single Stock
Individual stocks are much riskier investments than a well-diversified portfolio. Why is that?
Here are a few kinds of risk you are exposed to when you hold any single stock, or if your portfolio is heavily invested around one single stock:
Management risk: A company may have a stellar history of management, but there are no guarantees that that won’t change in the future. Abbott may have a great historical track record, but any change in management could have unpredictable results. For instance, if CEO Robert Ford were to retire or step down, it could cause a significant shift in how the company performs, its future prospects, and, in turn, the current price of the stock.
Industry-specific risk: When you are invested in a stock, you are also invested in that industry. If this industry takes a hit from world events, supply-chain issues, changing consumer demand, or rising costs, your individual stock can also go down in price. The pharmaceutical industry, in particular, is vulnerable to changes in legislation, drug approval and regulation, and supply chain issues.
Legal risk: If the company of the stock you hold gets into legal problems, it can lead to investor concerns, and the stock price could drop. In the case of Abbott, drug recalls or lawsuits over negative side effects can do lasting damage to the company’s reputation and trading price.
Technological risk: Technology is continually changing and advancing. It is nearly impossible to predict these changes, and when major advancements in technology occur, it could render an entire company or industry obsolete. Though it is highly unlikely that the pharmaceutical industry would ever become obsolete, there is a very real possibility that other manufacturers could outpace Abbott in technological advancements.
Lastly, the more you concentrate your investments in a single company, the more likely you are to become emotionally invested in the company. This is particularly true for Abbott employees who receive company stock as a form of compensation. Not only is your day-to-day livelihood tied to the success of the company, but your long-term future is as well. If the Abbott stock were to take a tumble, the emotional (and financial) ties you have to the company could lead to sub-optimal investment decisions (e.g., selling at low prices).
When you have most of your money concentrated in any single stock, you stand to lose a significant portion of your portfolio if something were to go wrong. But this can be avoided.
The Importance of Diversification
Diversifying your portfolio gives you exposure to a broad range of companies and industries that meet your investment objectives without the danger of putting all your eggs in one basket.
There are many factors outside your control, such as future company performance, industry changes, and world events.
Diversification means spreading your portfolio across many different asset classes, and across many different companies in many different sectors, industries, and geographies. This reduces the risk that you will lose all your money to any single investment.
At Gibbons Financial Group, we work with many Abbott/AbbVie employees, so we understand how to build well-diversified portfolios suited to your compensation structure and individual circumstances.
The Bottom Line
As with any investment, you must consider your risk tolerance and goals before making any decisions. All investments carry some amount of risk, but diversifying your portfolio can help minimize the risks of owning a concentrated position in any specific asset, company, or industry.
So when it comes to how much Abbott/AbbVie stock is safe to own, the answer depends on your needs, goals, and risk tolerance.
We Can Help
Managing your portfolio can be challenging when you have a highly concentrated position in your employer’s stock. At Gibbons Financial Group, we’re here to help Abbott and AbbVie employees navigate their equity compensation and build a diversified investment portfolio with confidence. When you work with us, you can rest easy knowing you have a valued trusted partner guiding you on your path to financial independence.
Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.