Every concentrated position comes with a story, and the story is always good. The company's winning. You work there — you can see it winning from the inside. The stock made you real money already. Why would you sell the thing that's working?
I never argue with the story. I just pull out the numbers, because the numbers on individual stocks — not your stock specifically, all of them, as a class — are wilder than almost anyone expects.
The base rates
Two studies do most of the work here. The first is J.P. Morgan's The Agony and the Ecstasy, which has tracked U.S. stocks since 1980. Roughly 40 percent of them experienced what the authors call a catastrophic decline: down 70 percent or more from the peak, permanently. Not a dip — a one-way trip. About two-thirds underperformed the broad market over their lifetimes, and the median stock underperformed it badly. A handful of megawinners carried everything else.
The second is Hendrik Bessembinder's Do Stocks Outperform Treasury Bills? — one of the most startling papers in modern finance. Looking at every U.S. listed stock since 1926, most individual stocks failed to beat one-month Treasury bills over their lifetimes, and essentially all of the market's net wealth creation came from about 4 percent of companies. The market's famous long-run return is real. It's just carried by a very small number of names, and the odds that your employer is one of them are lower than the story feels.
The arithmetic of losing
The other thing people underestimate is how asymmetric drawdowns are. Losses and gains aren't mirror images — a loss requires a much bigger gain to undo it:
| The stock falls… | Getting back to even requires… |
|---|---|
| −20% | +25% |
| −40% | +67% |
| −60% | +150% |
| −80% | +400% |
A diversified portfolio down 20 percent has a boring, well-traveled road back. A single stock down 60 percent needs to two-and-a-half-x just to break even — and per the J.P. Morgan data, a large fraction of stocks that fall that far simply never do.
The part that makes it worse for employees
If the concentrated stock is your employer's, you're not holding one risk. You're holding the same risk twice. Your salary, your bonus, your unvested grants, and your portfolio all depend on the same company having a good decade. The scenario where the stock drops 60 percent is heavily correlated with the scenario where the layoffs come — the two blows tend to land together, which is precisely when you'd need the portfolio to be fine.
This isn't just an advisor talking point. FINRA's own guidance for employees makes exactly this argument — if the company falters, your investments and your paycheck can go down together — and notes that some experts put the ceiling for any single stock, your employer's included, at around 10 percent of investment assets. When the regulator and the math agree, I listen.
What I actually tell people
- Run your net worth at −40 and −70. Not because those numbers are predictions — because they're historically ordinary outcomes for individual stocks. If the −70 scenario changes your family's life, the position is too big. That's the whole test.
- Notice the asymmetry of regret. Diversify and the stock keeps soaring? You're still wealthy — you just made slightly less. Stay concentrated and catch the bad branch? The plans change: the house, the timeline, sometimes the marriage's stress level. Those regrets are not the same size.
- You don't have to choose zero. Keeping 10 or 15 percent in the company you believe in keeps you on the upside without betting the family balance sheet. Concentration is a dial, not a switch.
The story about your company might be true. Plenty of winning stories are. But the base rates apply to everyone who's inside a good story — that's what makes them base rates. Size the position so that being wrong is survivable, and then go ahead and root for the stock with the part you kept.
Sources
- J.P. Morgan, "The Agony and the Ecstasy" (2024) — catastrophic-decline and underperformance statistics on U.S. stocks since 1980
- Bessembinder, "Do Stocks Outperform Treasury Bills?" Journal of Financial Economics (2018) — most individual stocks lose to T-bills; a tiny fraction create all the net wealth
- FINRA — Love Your Company Stock? Here's What to Know — the regulator's warning on employer-stock concentration, including the 10% guideline some experts use
This article is for informational and educational purposes only and is not investment, legal, or tax advice. Nothing here is a recommendation for your specific situation — talk to your advisor and your CPA before acting on anything you read. Fathom Wealth is the private wealth practice of Cameron Hunt, conducted through Savvy Advisors, Inc., an SEC-registered investment adviser. Tax figures cited reflect rules in effect for the year noted and can change.