The Employer Stock Concentration
Priya, 44, is a senior engineer earning $180,000 a year. Her investment portfolio is $650,000: $390,000 in vested shares of her employer, a listed technology company; $130,000 in a global equity unit trust; $80,000 in a bond fund; and $50,000 cash. Her HDB flat is fully paid and her CPF Retirement Account has $220,000. She wants to invest $100,000 from her CPF Ordinary Account and her annual SRS contribution of $15,300 into more employer shares because the stock has beaten the index for five years. Her risk questionnaire says 'balanced', but she sold all her equity funds in March 2020 and stayed in cash for 14 months. She says her job is secure and the company 'only hires the best'. Her employer shares are subject to a blackout window and she receives new vesting shares each year.
1. Assess the suitability of adding CPF and SRS money to employer shares, showing the concentration arithmetic.
Read the worked answer
Employer shares are already $390,000 of a $650,000 portfolio, or 60%. Adding $100,000 from CPF OA and $15,300 from SRS would raise total investments to $765,300 and employer stock to $505,300, or about 66%. That ignores her human capital, which is also tied to the same company: a downturn could hit her salary, unvested shares and portfolio at the same time. The risk questionnaire says 'balanced', but her 2020 behaviour-selling all equity funds and staying in cash for 14 months-shows low loss tolerance. Capacity may be high because the HDB is paid and CPF RA is substantial, but tolerance governs the portfolio she can hold without panicking. Adding more single-stock exposure is not suitable. A reasonable target is 10–20% in employer shares, with the rest diversified globally.
2. Recommend a target allocation and explain how CPF OA and SRS should be used, if at all.
Read the worked answer
Reduce employer stock to no more than 20% of investable assets, ideally 10–15%, and reinvest proceeds into a diversified global equity portfolio and bonds, using the cash and bond fund as stability reserves. CPF OA is retirement money and should not be used for a concentrated single stock. CPFIS-OA allows investment of OA savings above the retained threshold in permitted instruments, but costs, restrictions and her low tolerance argue for a diversified fund or leaving the OA to earn its floor rate. SRS can be useful for tax relief at her marginal rate, but the contribution should go into a diversified portfolio, not employer shares; withdrawals are taxed at retirement with partial exemption. Use the SRS contribution to diversify, not to double down. Keep six to twelve months of expenses in cash before investing.
3. What behavioural biases are present, and how should the adviser implement the change?
Read the worked answer
The main biases are recency (five years of outperformance extrapolated), familiarity and overconfidence (working for the company is treated as knowledge), and loss aversion revealed by the 2020 sale. The adviser should separate the decisions: first set an investment policy statement with a target allocation, rebalancing bands and a rule for selling vesting shares; then implement gradually to reduce regret. Use blackout windows and vesting dates to schedule sales, and check whether any shares are restricted. In Singapore, there is no capital gains tax, but RSU vesting is generally taxed as employment income, so coordinate with her tax adviser. Set a review meeting after the first rebalance and a pre-commitment rule for the next market fall. Document the concentration risk and her acknowledgment if she chooses a slower path.