Hello everyone, and welcome to the Retiring Canada Podcast.
In today’s episode, we’re diving into the risks of entering retirement with an overconcentration of stocks. Specifically, we’ll discuss:
What stock overconcentration looks like
The pitfalls it can create in retirement
The impact of stock options and company-associated risks
Ways to mitigate the tax implications of making a switch
Actionable steps to help protect your portfolio
Throughout my career, I’ve come across many portfolios that I would call… interesting. From penny stocks that were "hot tips" passed down through family members to vested company stock positions acquired over a career—sometimes worth hundreds of thousands, if not millions, of dollars.
Regardless of how it happens, an overconcentration of investments can severely damage your retirement. We’ve all heard the saying, “Don’t put all your eggs in one basket,” yet many investors fail to apply this wisdom to their retirement portfolios.
I understand why this happens, especially for those with company stock options. Whether through a matching program, performance incentives, or other means, there may come a point where not only does your annual income rely on your company’s success, but so does your retirement.
A classic cautionary tale is Nortel Networks, the former Canadian telecommunications giant that filed for bankruptcy in 2009. During its peak, employees saw tremendous stock price growth and continued to invest more, believing in the company’s future. Many were, on paper, millionaires—until the dot-com bubble burst. Stock prices crashed, and employees who had heavily invested in Nortel suddenly found themselves starting over, forced back into the workforce to rebuild their retirement savings.
It’s easy to look back with hindsight and think, “I wouldn’t have done that.” But the reality is, we’re all human. Many of us could have made the same decisions, given the circumstances.
Even if you don’t have an employee stock option plan, you may still be at risk. If you open your investment statement and see 20, 40, or even 50 individual stock positions, you’re likely overconcentrated—not necessarily in a single company, but still exposed to higher risk than necessary.
The Solution: Diversification
Diversification has been called "the only free lunch in investing." This concept stems from Harry Markowitz’s work on modern portfolio theory, which demonstrated that diversification can reduce volatility without lowering expected returns—or increase expected returns without increasing volatility—relative to individual assets.
In practice, diversification is easily achieved through low-cost investment solutions that allocate funds across global markets, helping investors maintain strong, risk-adjusted returns.
If your investment portfolio consists solely of individual stocks, you may be trying to "guess" your way into retirement as a stock picker rather than embracing a long-term, diversified strategy.
Addressing Concentration Risk
For those with significant overconcentration in a single stock—whether through stock options, a share purchase plan, early investment in a successful company, or private stock that later went public—there is often an emotional attachment. This stock may have been a cornerstone of your wealth-building journey, making it difficult to part with.
However, experienced investors recognize that holding a single stock—no matter how successful—introduces unnecessary risk. Even large companies can fail, especially in times of economic uncertainty.
I recently had lunch with another investment professional who encountered a real-world example of this risk. Two founders of a cannabis company built a successful brand and saw their shares skyrocket to eight-figure valuations. One founder recognized the risk, diversified, and protected his wealth. The other stayed fully invested and rode the stock’s decline all the way down.
This story highlights the importance of removing emotion—particularly fear and greed—from investment decisions to make way for sound, long-term financial planning.
How to Diversify Without Taking a Tax Hit
If you’re overconcentrated in a single stock, diversification is key. But how can you do it without incurring a significant tax liability? Here are a few options:
Borrowing Against the Stock – This allows you to access liquidity without immediately selling, but comes with risks, including ongoing interest payments and potential margin calls if the stock’s value drops.
Hedging Strategies – Some investors use hedging techniques to protect stock value while allowing for potential upside. However, this is typically a short-term solution that requires expertise and may not be viable in all cases
Selling and Reinvesting – The simplest approach is to sell the stock, pay the taxes, and reinvest in a diversified portfolio. However, with the capital gains inclusion rate increasing to two-thirds after $250,000, this can be costly.
In-Kind Exchange (Subsection 39(4) and 85(1) Elections) – These advanced tax strategies allow you to defer taxes while transitioning into a diversified portfolio. If your capital gain exceeds $100,000, this could be worth considering.
This last option involves industry-specific tax planning, but in simple terms, it helps control the timing of tax while achieving diversification—a true win-win.
If you have a large single-stock position in a non-registered account with substantial gains, consult your tax advisor about these strategies. If they make sense for you, reach out—we can help.
Action Items
If you're an employee or executive with a significant concentration in company stock, take a step back and objectively assess your portfolio. Remove the emotional attachment and ask yourself: If this were my parents’ retirement portfolio, what advice would I give them?
If you hold 20, 30, or 50 different stocks, ensure you’re not missing out on broader market returns. Diversification is your ally—embrace it.
Closing Thoughts
That’s it for today’s episode! Here’s how you can stay connected:
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And remember—when it comes to your retirement, don’t leave it to chance.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.