medium · Certified Financial Planner Psychology
The Brennan household consists of Michael, age 62, and Sarah, age 61. Michael holds a single-stock position in his former employer worth 1,400,000 with a cost basis of110,000. He acknowledges that this concentration (65% of liquid net worth) is risky but refuses to sell because the stock is currently 15% below its all-time high, stating he will diversify once it "gets back to even."
Which action should the planner take first?
- Present a quantitative analysis of the standard deviation of a single security versus a diversified index in this case
- Recommend the immediate purchase of a zero-cost collar to hedge the position against further declines
- Refuse to manage the portfolio until Michael agrees to a 20% reduction in the concentrated position
- Explain the risks of the concentration, document the discussion and Michael's refusal, and follow his instructions
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