It's Your Money  

Managing your money towards retirement

Diversifying your assets

When managing their overall net worth and planning towards their retirement, there are many Canadians who encounter a distinctive hurdle—a significant portion of their savings is often invested directly into their employer's stock.

This situation can lead to significant overexposure to a single company's performance (and often also overexposure to a specific industry sector), posing risks in the event of adverse market movements or company-specific challenges.

Investing a large portion of one's savings in employer stock can create concentration risk, leaving investors vulnerable to fluctuations in the company's performance and broader economic trends. While loyalty to one's employer is commendable, it's essential to ensure that investment decisions are grounded in diversification principles to safeguard against potential losses.

Sometimes, the old adage of “invest in what you know” can have serious negative consequences as well. I’ve seen countless examples of someone who works in a specific industry and has much of their savings in their own company’s stock and then the parts they don’t have in their own company’s shares are invested in other companies in the same industry since this is the area they know best.

For example, picture someone who works in the oil industry and the majority of their retirement savings are in the stock of their own company. The remainder of their investments are then put into the stocks of other oil and oil service companies since this investor knows that area and feels “safe” putting money there. If the oil markets take a prolonged downturn, they could be in big trouble.

Further complicating the situation is that many Canadians are already overexposed to the housing markets with much of their net worth tied up in their primary home. Now imagine someone who’s worked is tied to the housing market and their investments are in that company’s stock.

To protect yourself from these concentration risks, here are some effective strategies investors can consider to mitigate the lack of diversification that many are facing:

1. Asset allocation: A fundamental approach to diversification involves spreading investments across various asset classes, such as stocks, bonds, and alternative investments. By diversifying beyond employer stock and into other sectors, investors can reduce their exposure to company-specific risks and enhance portfolio resilience. Familiarize yourself with investment correlation (how different assets move in relation to each other) and look for options that will react differently to various market events.

2. Gradual reduction of employer stock exposure: While holding employer stock may offer certain benefits, investors should aim to gradually reduce their allocation over time. Implementing a systematic approach to rebalancing allows investors to trim their exposure to employer stock while maintaining a diversified portfolio.

3. Employ dollar-cost averaging: Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy can help mitigate the impact of market volatility and reduce the risk associated with timing the market, particularly when diversifying out of employer stock mentioned above.

4. Utilize Tax-Advantaged accounts: Take advantage of tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) to diversify investments and optimize tax efficiency. These accounts offer a range of investment options, enabling investors to construct well-diversified portfolios while minimizing tax liabilities.

5. Avoid certain sectors: If you work in say the banking industry and have company stock and/or stock options as part of your compensation, you near to carefully consider any further investments in the same sector. Similarly, if you have a significant portion of your wealth tied up in your primary home, carefully consider further allocation to real estate based investments or ones that are tied to housing prices.

Managing concentration risk stemming from heavy investments in employer stock requires a proactive approach to diversification. By being aware of the risks and implementing appropriate strategies, Canadians can build resilient portfolios that withstand market uncertainties.

By embracing diversification principles, investors can navigate the challenges posed by concentrated holdings and pursue their long-term financial goals with confidence.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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