Chloe: 64% of a £1.4m portfolio in one FTSE 100 share
Chloe, 61, has a £1.4 million portfolio: £900,000 in shares of the FTSE 100 company she worked for until last year, £300,000 in a global equity fund and £200,000 in cash. Her final-salary pension pays £28,000 a year from age 65 and she has £60,000 in an ISA. She plans to retire at 64 and needs £60,000 a year gross, rising with inflation, from her portfolio. The shares have a base cost of £120,000, are held in a general investment account and currently yield 3.5%. Chloe says she will not sell because 'the dividend pays my income, the company is a national institution and my father worked there too'. A 30% fall in the share price would reduce her portfolio by £270,000. The company has just announced a large debt-funded acquisition, and its credit default swap spread has widened.
1. Assess the risk in Chloe's portfolio, quantifying the concentration and explaining the specific risks she faces.
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Concentration. £900,000 of £1.4 million is 64.3% in a single company. A 30% fall removes £270,000, or 19.3% of the total portfolio, before any correlated fall in the global fund. This is idiosyncratic, uncompensated risk: the market does not pay a premium for holding a risk that could be diversified away.
Human capital correlation. Until last year her salary and share options depended on the same company. Her final-salary pension is separate, but her financial capital is heavily tied to one employer and one sector.
Income concentration. The 3.5% yield is about £31,500 a year, roughly half her £60,000 target. If the dividend is cut after the debt-funded acquisition, she loses income and capital at the same time.
Withdrawal and sequence risk. She needs £60,000 from £1.4 million, about 4.3% a year, rising with inflation, for a retirement that could last 30 years. A severe fall in the first few years, combined with withdrawals, permanently impairs the portfolio. The £200,000 cash covers about three years of spending and is a useful buffer, but it does not solve the concentration.
Event risk. The acquisition, higher leverage and widening CDS spread raise the chance of a rating downgrade, dividend pressure or a rights issue. Her statement about loyalty and family history is an emotional attachment, not an investment rationale.
2. Recommend a de-risking plan, including the tax tools available, and show how you would sequence it.
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Set a target. Reduce the single stock to a maximum of 10-15% of the portfolio, say £140,000-£210,000, retaining a residual holding only if she accepts the risk in writing.
Use the cash buffer first. Hold £180,000-£200,000 in cash or short gilts to fund three years of spending, so she is never forced to sell shares after a fall.
Dispose in tranches. Sell over four to six tax years, using the £3,000 annual exempt amount and the basic rate band each year. Before 65 she may have little taxable income, so more of each year's gain can fall at 18%; after the pension starts, the band is reduced. Spread sales quarterly to reduce timing risk.
Tax wrappers and reliefs. Use the £20,000 ISA allowance each year through bed-and-ISA, accepting that the CGT is triggered. Consider gifting shares to charity, which can be done free of CGT with Gift Aid relief, if she has philanthropic intentions. EIS deferral is possible only if she can accept illiquidity and high risk. A spouse or civil partner, if applicable, doubles the allowances.
Reinvest. Proceeds should go into a diversified, low-cost global equity and bond mix matched to her risk capacity, with the income requirement modelled.
Hedging. A collar or equity swap could protect the residual holding, but costs and complexity usually make outright sales preferable.
3. How should the adviser handle Chloe's refusal to sell, and what should be documented and monitored?
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Acknowledge the emotion. The loyalty and family history are real, so start from her goals, not the product. Show what the concentration means in pounds: a 30% fall equals four to five years of her £60,000 income. Use scenario analysis and historical drawdowns rather than arguing about the company.
Offer a compromise. A phased programme with a residual holding and a written 'stop-loss' or review trigger gives her control while reducing risk. Explain that retaining 10-15% still gives her exposure and dividends.
Record the advice. If she refuses, document the recommendation, the risks explained, her reasons, the capacity for loss discussion and her signed acknowledgement. This protects both parties and evidences Consumer Duty. If the firm's policy requires a maximum single-stock limit, escalate to compliance.
Set triggers and monitoring. Agree review dates, a maximum position size, a dividend-cut trigger and a price fall trigger. Monitor the acquisition's effect on leverage, the credit rating and the dividend cover. Revisit the cash buffer annually.
Behavioural tools. Frame the decision as switching from one company to many, not as disloyalty. Avoid over-claiming certainty. If she remains unwilling, consider a protective option overlay on part of the holding and hold more cash to reduce forced-selling risk.