Jason interviews Andrew Comstock, CFA  President and Chief Investment Officer at Castlebar Asset Management about how much company stock is too much.

Andrew has over a decade of experience analyzing financial markets and working with clients to achieve their financial goals. He began his career as a portfolio manager and analyst for an institutional investment group in Switzerland owned by the HVB Group from Germany. Andrew managed the Activest Global Convertible Bond Fund as well as assets for pension funds and insurance companies. Since 2004, his focus has been translating the investment analysis used for institutional investment management and providing the same level of service to individual clients. Andrew has experience managing equity and fixed income portfolios in the US and international markets.

He graduated from the University of Tulsa with a Bachelor of Science in Business Administration and is a CFA Charterholder. Andrew lives in the Kansas City Area and is married. He is an active member of the Overland Park South Rotary Club. Andrew is President of the Kansas City Chapter of the University of Tulsa Alumni Association and serves on the Board of Directors for the University of Tulsa Alumni Association. He is member of the Kansas City CFA Society.

To learn more please visit www.castlebaram.com

A Financial Guide To Owning Your Company’s Stock

Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker.

 Jason: Seattle, Tacoma, Olympia, Gig Harbor, all the good people right here in Kitsap County, welcome back to another round of Sound Retirement Radio. I sure appreciate you tuning in to our program as you may be driving down the road this morning, or sitting at home drinking your coffee on a beautiful Saturday morning here in sunny Seattle, Washington. If you’re tuning in from around the country, I’d love to meet you sometime. If you ever get out this way, be sure to look us up. We’re out here in Silverdale, Washington.

 As you know, I always like to get the morning started right, and one of the best ways I think we can do that is by renewing our minds. I’ve got a verse here from Hebrews 10:24-25. Here it is: “And let us consider how we may spur one another on toward love and good deeds. Not giving up meeting together, as some are in habit of doing, but encouraging one another and all the more as you see the day approaching.”

 Boy, I love that. As I was thinking about that verse this morning, I was wondering who are you? Who am I? When people think of us, do they think of us as the encourager, the one that’s encouraging people? I know, far too often, and I didn’t realize this until I had children, but you recognize when your children begin to communicate the way that you do and I realize that I was a problem-finder, not an encourager. And so, it’s really been working hard on trying to change that vocabulary around, instead of looking for problems all the time.

 The other thing I like to do is share a joke. I know how much you guys look forward to these jokes. This one is … this boy walks into the kitchen, he says, “Mom, can I have 20 bucks?” And the mom looks at him and she says, “Am I made of money?” And the son says, “Well, isn’t that what mom stands for? M-O-M, Made of Money?” Oh yes, that’s right. Kids.

 We’ve got a great program lined up for you guys today. If you’re driving down the road and you’re not going to get a chance to listen to this entire program, you can listen online at SoundRetirementRadio.com or SoundRetirementPlanning.com. You’re listening to Episode 079, Episode 79.

 We’re always looking to bring experts onto the program who we believe can add significant meaningful value to your financial life as you’re preparing for and transitioning into and through retirement. The title of this program is How Much Company Stock is Too Much. We’re going to be talking about concentrated stock positions and I’ve got a great guest lined up for us. Today I have Andrew Comstock on the program. He’s a chartered financial analyst, CFA. Andrew has over a decade of experience analyzing financial markets and working with clients to achieve their financial goals. He began his career as a portfolio manager and analyst for an institutional investment group in Switzerland, owned by the HVB Group from Germany. Andrew managed the activist Global Convertible Bond Fund as well as assets for pension funds and insurance companies.

 Since 2004, his focus has been on translating the investment analysis used for institutional investment management and providing the same level of service to individual clients. Andrew has experience managing equity and fixed income portfolios in the U.S. and international markets.

 Andrew Comstock, welcome to Sound Retirement Radio.

Andrew: Thanks for having me, Jason. I’m looking forward to today.

 Jason: Absolutely. Well, we look forward to having you as a guest. I want to start out. We’re going to be talking about concentrated stock positions. I’m having a hard time spitting that out for some reason this morning. But before we get into the subject, you know there’s been a lot of volatility in the markets here recently and I just wanted to get your take. As people are preparing for and transitioning through retirement, as you look into the financial markets, Andrew, what do you see happening? What are some of the concerns people should be having and what are some of the opportunities to capture?

Andrew: That’s a great question. I think it’s very pertinent given what’s gone on the first week or so of the New Year. I think you’ve got to kind of maintain a long-term time arising. That’s what we always encourage our clients. If you’re going to invest in the stock market side of the portfolio, you’re going to have periods where you experience volatility, like what we have. It’s kind of a standard long-term answer, but what does it mean in the short term? What’s going on right now? I think there’s a lot of concern about the price of oil and that is translating through the entire financial markets, both on the stock and on the fixed income side. Right now, we are a little bit cautious with things, but again, I think we’re still fairly optimistic about 2016 even though we’re starting off on a pretty, pretty tough note.

 If corporate earnings are able to meet our expectations or come somewhere near expectations, we expect things could turn around and there’s a chance that we could have a positive number at the end of this year and kind of get out of the cycle that we are in right now. That’s kind of where we are right now for our quick take on the markets.

 Jason: Andrew, some people say that the market runs in cycles. It tends to run seven years up and then three years down or something like that. We’ve been in a bull market for a long time. Interest rates are on their way up and bonds. This priced earnings of the market seems really expensive on a historical basis, but you’re still optimistic. You still think there’s opportunity for good positive returns for 2016.

Andrew: I think the way we’re positioning things right now for our folks is we are still fairly optimistic. I think we are in the … We’ve been saying this for about nine months in the late cycle of a bull market. That tends to have a lot more volatility. You tend to see a lot more merger and acquisition deals in this phase of the market, but in terms of your timeline. Are we on borrowed time? I do think so. Do I think that we’re counting down to the end of this bull market? That’s kind of where we see things, but John Templeton, who’s a famous investment manager has got a great quote where he says, “Bull markets usually die in a moment of euphoria.” I don’t know if we’ve necessarily had that moment of euphoria yet that we would typically look for to say this is the peak of the market. We certainly could have had that maybe last year sometime, but we haven’t seen that moment yet, so that’s where we’re leaning to.

 I think it’s time to get more cautious. I don’t think it’s time to be the most aggressive, particularly for someone who’s looking at retirement in the next few years. I don’t think it’s time to put the accelerator down by any means. I think it’s time to play a little more defense than offense at the moment.

 Jason: All right. That brings us right into the main topic here that we want to cover, which is how much company stock is too much? We see this all the time. Not all the time, but oftentimes, especially from companies that reward their employees through ownership of stock. I guess we’ll start out with the basics. The first question is, why own your company’s stock in the first place?

Andrew: That’s a great question. There’s a lot of reasons why somebody should own their company’s stocks. Let’s say you work for a large corporation that’s publicly traded or even if you have an equity stake in a private business, it’s important to feel a sense of pride when you go to work every day. You’re not just working for a paycheck, but you’re actually an owner in the business, whether it’s a tiny fraction of a publicly traded company, or maybe you own a percentage of a business that’s private. It’s really important to have that value add and to feel positive in the self net worth when you go to the office every single day. That’s one reason why it makes sense.

 It could be financially lucrative as well. If you feel like the business is going to be successful, and as someone who goes to work every day and looks at the prospects of that, there’s an opportunity that this could be a financially lucrative opportunity. There’s a lot of people that say you should only invest in what you know. Who knows the business that you go to work in every day better than yourself? I think those are two reasons why it makes sense to own your company’s stock whenever you’re investing.

 Jason: Out here in the incredible Northwest, we have some amazing companies that are doing awesome things, and there’s a lot of people that have been benefiting from their growth over the years. I know that before we started the program, you mentioned that you’ve worked with some employees from Amazon, and obviously that … What a wonderful story from a stock perspective. That was last year, especially. Holy smokes! Hold on to your hat. I’m just a big fan of Amazon, personally. I use their products. We have one of those new Amazon Echoes in our home, which I just think is the coolest thing since sliced bread. Love it.

 What could go wrong, for somebody that has a big position in a company that they work for? What are some of the things that could derail their situation?

Andrew: I think it’s important to look at the downside, too. Wherever you have a significant ownership in a company that you work for, there’s several factors to take into consideration. Amazon is a perfect example. The company … I think a lot of people who work for Amazon receive restricted stock units or some other type of equity or stock compensation. I know Amazon matches their 401K. The employer matches is done in company stock, which is becoming less common. All of a sudden, it can creep up to be a significant percentage of your net worth. If you go to work for a company and then you’ve been there for 5 years, maybe 10 years, all of a sudden 50, 60, 70 percent of your net worth could be tied up in shares of that company and you may not realize it. That’s the first thing that we always want people to look at, is to make sure that they understand how much exposure they have to their own company’s stock.

 The second thing we always talk about is what we call human capital. If you’re relatively early in your career, or even late in your career, you earn a paycheck from this company. You get benefits from this company. Not only, maybe, is a significant portion of your net worth tied up in the stock of this company, but your future earnings and your future insurance payments, and healthcare, and things like that, are also tied up in this company. That can be a valuation that people often forget. I think that’s important to incorporate it in any analysis you do.

 I think if you look back into the early parts of 2000, Enron and WorldCom were two pretty famous corporate bankruptcies that took place. A lot of the employees held onto those shares for a very, very long period of time. Oftentimes, there was some management misbehavior that led to those companies meeting their fate, but they were encouraging their employees to buy stock all the way down because they’d consider it an opportunity. I think you have to look back to the past, and we have to look at history and say, “It doesn’t always end perfectly, but it can be very lucrative, as it has been for Amazon employees who benefited in the last few years.”

 Jason: It’s not just those two examples. I think those are probably two of the extremes, but a couple of the other ones I’ve run into are where I met somebody who had worked for a bank. Most of their retirement funds were invested in bank stock, and the bank failed. They lost everything. Their retirement dream was really put on hold. I know other people that have worked for the airlines and had a lot of money invested in airlines and saw bankruptcies.

 I know some people, as they’re planning for retirement, maybe they have a pension from their employer, and they start worrying about the amount of money they have in company stock because they also have a pension. If the company gets into trouble, not only do they potentially lose money as a result of the value of the stock going down, but their pension also could be at stake. This is a really important topic. You would be surprised how often we run into people that have highly concentrated positions in a single company.

 What in your opinion, from the work that you’ve done, from the research you’ve done, how much is too much? How much company stock should somebody own?

Andrew: That’s a great question. It really comes down to the individual, specific situation. You’ve got to look at everybody on a one-by-one basis. Let’s say you have somebody who’s nearing retirement. The ability for them to hold a very concentrated position in stock is going to be less than, let’s say, somebody who’s 30-years-old and is relatively new in their career. I think that’s ultimately … There’s kind of a slide rule effect, essentially, or a sliding scale. The closer you are to retirement, your ability to hold a very tight concentration of stock is going to be a lot less than say somebody who is in their 20s, or 30s, who has a long time in their career to make up for any volatility that they may experience in the portfolio.

 Now, specific percentages … Again, that comes down in the situation. Usually what we kind of advocate for our clients is we want to have less than 20 percent for somebody who is early in their career in company stock. If they have a high-risk tolerance and a very high confidence in their company, and they’re comfortable with the potential downside, you could slide that up. Somebody who’s near retirement, that number has got to be less than 10 percent. It probably needs to be less than 5 percent, because the risk is too great.

 As you kind of stated, maybe they have a pension with that company if it’s a legacy business. They may be getting more compensation through stock, grants or restricted stock units or stock options, so they’re going to be having more stock coming on board just before retirement as well. It really comes down to everybody’s specific situation, but the key is knowing how much you own. That’s typically a blind spot. People know that they have exposure to it, but they’re always shocked to what extent of their net worth usually is represented. That’s often what we find when we meet with folks who come to us with this issue.

 Jason: As I think about how much company stock to own, I remember years and years and years ago, I was meeting with a friend. He had recently acquired a job with Google. This was early on. I think he was one of the first 150 employees or so at Google. I remember him telling me that he was going to take his credit cards and get every cash advance he could get to buy as much company stock as he could afford in Google. At the time, I remember thinking, “Man, that’s really aggressive. That’s kind of scary.” But, boy did that turn out well for him. I’m not encouraging a lot of people to go out and leverage themselves up like that. Do you ever run into situations though where you find people that are so optimistic about the company that they’re working for that they take those types of risks?

Andrew: I absolutely experience that every so often. From a financial planning perspective, we can encourage people to do what we think is prudent, but I know a lot of people who’ve accumulated some significant sums of wealth by focusing on concentrating positions in a leveraged manner. I have more stories where people come back and say, “I did it. I was up, and then I continued to do it. Now I have nothing.” I’ve seen that play out both situations. I tend to be a little more risk averse in the way we encourage our clients to behave and to kind of look at things like this.

 Ultimately, it’s up to somebody’s risk tolerance. Somebody who’s nearing retirement, clearly that’s something that they’re probably not a strategy that they’re going to do. Somebody who’s early in their career and has a high ability to recover from that, it’s certainly something they could look at doing, but it’s one of those things that you’re making a deal with the devil almost, at that point. It’s a question of going to the casino, or saving for retirement kind of the right way, is the way I would look at it.

 Jason: How do you help people determine risk tolerance?

Andrew: Excellent question. We use three different ways to refine people’s risk tolerance. We have a questionnaire that we do that gives somebody a risk number. I think everybody’s familiar with the Sleep Number bed. You’ve maybe seen those commercials. Well, we use a software that actually gives our clients a risk number, where they answer some questions about upside and downside of certain situations, how much they’re comfortable with experiencing. That kind of gives us a starting place.

 Then we have a conversation. We ask them to talk about money. We ask them to talk about successes they’ve had with money. We’ve asked them to have moments when they’ve been frustrated, or concerned, or scared about money. In that conversation alone, that tells us a lot about how they feel about risk.

 Then we use a third thing. We look at people’s willingness to take risks, so through their past behavior, through their actions that they tell us they want to move forward with, and then their ability to take risk. Somebody who has a large net worth, but modest expectations of how to spend it, they’re going to have a bit higher ability to take risk than somebody who is trying to stick the landing in order to retire on time. They need a lot of things to happen right because they haven’t been diligent about saving.

 We put all three of those things together and come up with a risk plan for somebody, essentially. We take their risk number, we take their ability, we take their willingness, and we just take the way that they talk about investing. The way they talk about money, whether they talk about being scared or whether they talk about being optimistic and combine all those things to give us a good overview. Usually, little things in there will stick out to us and present to us whether somebody is taking the right amount of risk with their investments, or if they’re taking too much risk for their investments.

 Jason: One of the things I like to do too, and you may do this as well, but I like to ask people, when it comes to how much money they want to see their portfolio growing at, usually they have some kind of idea in mind about what percentage they’d like to see it earning. I always like to remind people and encourage people to use their retirement plan to understand need versus want in terms of rate of return. That way, we know if you need to earn 4 percent or the number’s aren’t going to work, or you need to earn 5 percent or the number’s aren’t going to work, you know what that is.

 On the downside of the equation, if somebody comes in and they have a million dollars, to ask them, “Are you comfortable losing $300,000 in one year? Are you comfortable losing $200,000 in one year?” Just really understanding from a downside perspective, because I don’t know if you’ve found this to be true or not, Andrew, but it seems like when people are losing money they don’t think in percentages. They think in dollars. Do you find that to be the case?

Andrew: That’s 100 percent. That’s kind of where the risk software that we use … It breaks things down in that. As you would expect, someone who is in their early part or their mid part of their career, they’re okay with those numbers being … If they have a million dollar net worth, they’re okay seeing it down $150,000 or $200,000 in a year knowing that they have the ability to make that up relatively quickly. When you find somebody who’s in their 60s and retirement’s right there, or in retirement, those numbers mean a lot more to them. They certainly want to see their downside capped or limited. That’s a great example and that’s something that we use.

 Something else you said is, when we ask people about their rate of return, we find people are far too conservative and they say, “All I need is a 3 or 4 percent rate of return,” which is barely going to keep up with inflation. We have people that come in and expect to earn 15 or 16 percent rate of return, which we know is really, really difficult to achieve over a long period of time. It’s not impossible. That’s another thing that we find. I rarely find people who come in at that 6, 7, 8 percent, which is probably what a balanced portfolio could deliver over a long period of time.

 Jason: You have a lot of experience. You’ve worked on the institutional side. You managed a Convertible Bond Fund. The traditional method of diversifying a portfolio would say that as you get older, you would have more money allocated towards bonds and less money allocated towards stocks. In the injurious rate environment we’re in now, Andrew, where we’ve seen interest rates slashed to zero, they’re just finally starting up after almost 10 years of being at zero. Is having a large bond position in a portfolio still the wisest thing to do to reduce portfolio volatility over time?

Andrew: It’s certainly different than it has been. We are clearly at the end of what has been a very long bull market for bonds. We still advocate having a fixed income or bond position for clients right now. I think what you have to recognize is that interest rates are likely to move higher, and that’s certainly going to impact the rate of return on fixed income or bond investments. We still believe that it’s a great buffer, it’s a great counterweight to having stocks in a portfolio. Instead of having this traditional 5, 6, 7 percent rate of return that a lot of people are used to seeing in their fixed income portfolio, which is as crazy to hear me say, we’re more or less looking at the yields and maturities that either their mutual funds are offering, or the actual individual municipal bonds or corporate bonds they’re owning and saying, “That’s more likely going to be the rate of return that you’re going to receive going forward for the next few years.”

 We’re dialing back our expectations. We’re dialing back our expected returns on the bond side to manage that. We’re not necessarily taking more risk. We’re just telling people that we expect returns to be lower moving forward for the next few years until we get to a more normal interest rate and normal monetary policy environment.

 Jason: Okay. I know that you’re doing a lot of work out there to educate people. One of the reasons that this interview came about had to do with a blog post that you wrote on this topic specifically of how much company stock is too much. Will you share with our listeners, if they want to learn more about the work that you’re doing, how they can find you online?

Andrew: Absolutely. The best place to find us is probably on our blog, which is Castlebar Asset Management blog. That’s castlebaram.com. You can Google us. You can follow me on Twitter @castlebaram. We post things there pretty regularly, and we try and post a lot of educational pieces on a wide variety of topics.

 Jason: If you’re just tuning in, I’ve got Andrew Comstock, CFA, on the program with us. You’re listening to Episode 079. We archive and transcribe all these programs for you online. Andrew, we only have about a minute left, but in the last minute, what’s your best advice for somebody heading into retirement today?

Andrew: Could you repeat the question, Jason?

 Jason: Your best advice for somebody heading into retirement today?

Andrew: Yeah, absolutely. I think right now, the best advice I have is probably just to have more modest return expectations for their investment portfolio for the next 5 years. That’s something that we are kind of educating our own clients on is that we’ve been used to some pretty good returns since the end of the financial crisis both on the bond side and on the stock side. I think we just have to be more modest in what we expect moving forward, and that returns aren’t [crosstalk 00:24:00].

 Jason: Thank you so much for being a guest on Sound Retirement Radio today.

Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only, and should not be construed as specific tax, legal or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, it’s representatives, or its affiliates, have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the President of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Ave. NW Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at SoundRetirementPlanning.com.