The Concentrated Employer Stock and the Risk Questionnaire
Priya, 49, is a senior manager at a listed technology company. Her total investable assets are €600,000: €380,000 in vested employer shares, €120,000 in a money market fund, and €100,000 in a diversified global equity fund. She also has a pension worth €450,000, invested in the default lifestyle fund. Her risk questionnaire scores her as 'moderate'. Last year, during a 15% market fall, she sold all the equity funds in her pension and moved to cash for four months, then reinvested after the recovery. She plans to retire at 60 and needs €45,000 a year net from age 60. She has just received a €60,000 bonus and asks whether to buy more employer shares because 'the share price always comes back'. She has no emergency fund outside the portfolio and a €200,000 mortgage.
1. Distinguish risk tolerance, risk capacity, and behavioural bias in Priya's case.
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Risk tolerance is her psychological attitude to volatility. The questionnaire says moderate, but her behaviour last year says otherwise: she sold equities during a 15% fall and only reinvested after the recovery, which crystallised a loss and missed the rebound. That is recency bias and loss aversion, and it suggests her true tolerance is lower than 'moderate'.
Risk capacity is her financial ability to bear losses without derailing her goals. She needs €45,000 a year from age 60, has a €200,000 mortgage, and no emergency fund outside the portfolio. That capacity is moderate at best, and it is weakened by concentration. Behavioural bias is also present in her loyalty to employer shares: 'the share price always comes back' is overconfidence and familiarity bias. A 63% allocation to one employer links her salary, pension and portfolio to the same company. The questionnaire alone is not a reliable guide; her past action and her balance sheet are stronger evidence.
2. Recommend an allocation and implementation plan for the €60,000 bonus and existing portfolio, with reasoning.
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Do not buy more employer shares. Use the €60,000 bonus first to create an emergency fund of six months' essential spending, perhaps €30,000, held in cash or short-dated deposits. Invest the remaining €30,000 into a diversified global equity or multi-asset fund consistent with her true tolerance.
For the existing portfolio, set a concentration limit - for example, no more than 10–15% in employer shares. That means reducing the €380,000 holding to roughly €60,000–€90,000 over two to three tax years. Sell the highest-cost-base lots first where possible, use annual capital gains allowances, and avoid selling everything in one tax year. Reinvest proceeds into a diversified portfolio and consider holding two to three years of retirement spending in bonds or cash as she approaches 60. Review the pension default: if it is too equity-heavy for her behaviour, use a diversified fund with a suitable glide path rather than abandoning equities during the next fall. Document the tax and transaction costs.
3. How would you communicate the concentration risk without triggering another panic sale?
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Start with her goals, not the product. Ask: 'If the share price fell 50% and your job was at risk at the same time, how would that affect your retirement at 60?' Use a two-column comparison of the current portfolio and a diversified one under a severe but plausible scenario. Show that a 50% fall in employer shares would wipe out about €190,000 of the €600,000 portfolio before any other losses. Then agree a written investment policy statement with a staged selling schedule, pre-committed review dates, and a rule that decisions are not made during a market fall without a 48-hour pause. Frame diversification as risk control, not a lack of loyalty. Automate sales and reinvestment so the decision is not repeated under stress.