What Now Steph Curry?

Bill Parrott |
Categories
Financial Planning
retirement planning

One of the splash brothers is down!  It’s heartbreaking to think Steph Curry might miss the rest of the playoffs after his incredible, record setting season.  So, too, for the Golden State Warriors who set an NBA record for 73 wins.   The Warriors were destined to win another NBA title before Mr. Curry was injured.

The Warriors aren’t alone in losing a superstar.   The L.A. Clippers lost two – Chris Paul and Blake Griffin.  The odds for the Warriors and Clippers to win the NBA title dropped after the injuries.   Their loss, however, is San Antonio’s gain.  The Spurs chances of winning the title are now almost even with the Warriors.

The Warriors lost 20% of their starting five while the Clippers lost 40%. 

How would your investment portfolio perform if 20% or 40% of it was “injured”?   What if you bet on a “star” stock and it got hurt?   Apple has been a longtime fan favorite and recently it has fallen on hard times.  Apple is down 26% from its all-time high.   This drop has caused a lot of pain for investors.   All is not lost, however.  If you had invested $100,000 in Apple ten years ago it’s now worth $1.3 million for an average annual return of 29.34%.   Apple, like Curry, will once again return to glory.

What to do if you have a chunk of your assets in one or two high flying stocks?  If you own a holding of 20% or more this is considered a concentrated holding.   Here are a few strategies you can employ to protect your investments:

  • Sell 10% or 15% of your holding to reduce its dominance over the rest of your account.  Of course, you want to pay attention to capital gains if it’s held in a taxable account.
  • Purchases put options to protect your position.  A put option will appreciate if your “star” holding falls in value.  The gain in the put option will offset the loss in value from the drop in your stock.    Buying puts on a regular basis will be expensive especially if your stock continues to appreciate.   Think about the cost to insure you and your family – health, life, auto, home, etc. 
  • A zero-cost collar can help offset the cost of buying puts.  By selling a call option to generate income you’ll be able to offset the cost to purchase your put option.   The advantage to this strategy is your out of pocket cost will be zero to negligible.  The disadvantage is your gain in the stock will be capped by the selling of the call option. 
  • A diversified portfolio will lower your dependence on a star player.  As I mentioned, the Warriors pain is the Spurs gain.  While Apple hasn’t performed well other investments have.  Amazon, McDonald’s, Time Warner, Facebook, Alphabet, Home Depot, Altria, Lockheed Martin, Philip Morris and Mondelez are all up 20% or more for the past 12 months.   Boring bonds have also done well similar to Set Shot in The Fish That Saved Pittsburgh.   He wasn’t given much of chance to succeed but did well when he had to.

A concentrated position is fun to own when it’s appreciating in value not so much when it starts to go down.   It pays to pay attention to your position limits and asset allocation.   Rebalancing your accounts once or twice a year will help keep your holdings in check.

My final thought is the Spurs will when it all – in four.

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.”  Mark 12:17

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com.

Notes:  www.oddssharkcom/nba/nba-futures; Morningstar Office Hypothetical Tool – March 2006 to March 2016.  Options involve risk and are not suitable for all investors.