Nike: Single Stock Risk and When to Diversify
Like many large companies, Nike offers its employees multiple avenues to acquire its stock, including employee stock purchase plans (ESPP), equity compensation, and deferred compensation programs. While Nike’s stock has faced recent headwinds, including showing consumer demand and margin pressure, it remains a key source of long-term wealth for many across the greater Portland metro area.
Over the past decade, Nike stock has consistently delivered meaningful growth, contributing to a substantial transfer of wealth into the local economy. That said, periods of volatility have also underscored the risks of holding a concentrated position in a single stock, especially one tied to your employer.
If your balance sheet is heavily weighted toward Nike, it may be time to revisit your strategy. To build a thoughtful diversification plan, we first need to define what a concentrated position is and why spreading your investments across a wide range of investment opportunities may be better for protecting and growing your wealth over time.
What is a concentrated stock position?
As the name implies, a concentrated stock position is an undiversified holding that maintains a substantial allocation in an investment portfolio. Some investors tie it to a certain percentage of your overall allocation, but applying an arbitrary percentage isn’t the best way to frame the conversation.
The key consideration is whether your plan remains successful if the stock price in question were to drop to zero. Although unlikely, this scenario presents a real risk that comes with all individual stock investments.
Why relying on one stock is risky
Investment risk generally falls into two main categories: market risk and idiosyncratic risk.
Market risk refers to the broad, systemic risk that comes with participating in capital markets. It can’t be avoided through diversification, but most investors accept it in exchange for the potential of long-term returns.
Idiosyncratic risk, on the other hand, is specific to a company. Stock price swings caused by missed earnings, negative forward guidance, or executive turnover are all examples. These events tend to affect a single company and have little impact on the broader market.
This kind of risk becomes even more pronounced when employees hold a significant portion of their net worth in their own company’s stock. If the company struggles, they may face a double hit — both in their investment portfolio and in their paycheck or benefits. When earnings potential and investment performance decline simultaneously, it can create serious strain on even a well-constructed financial plan.
So if idiosyncratic risk often goes unrewarded over the long run, why don’t more investors diversify? In many cases, it comes down to a few key obstacles—both financial and emotional.
Is diversification more profitable?
Diversification remains one of the most effective ways to mitigate investment risk while still achieving meaningful long-term returns, sufficient to support a confident and comfortable retirement.
Still, every investment carries some level of risk. And when you’ve ridden the success of a few standout companies, the idea of diversifying can feel counterintuitive.
Sometimes, it’s the tax consequences that get in the way. Selling a concentrated position may trigger a sizable tax bill, one that feels hard to justify in the short term. But a single quarter of poor performance can easily wipe out more value than the taxes would have cost.
Other times, the resistance is emotional. Letting go of the company that helped you build your wealth may feel like abandoning a winning team. Parting ways with what has worked is difficult — until it stops working.
The benefits of diversification
Diversification presents three unique benefits that single company stock can’t compete with: reducing volatility, protecting assets, and generating a smoother return stream.
When one stock performs poorly, your other stocks may perform better during the same timeframe, so that you continue generating returns. This helps reduce your overall losses and makes you less reliant on a single source of investment income. Better yet, you could take the selection process out of it and buy the entire stock market with a low-cost ETF or mutual fund for any long-term dollars.
Additionally, diversification can help protect the gains you’ve made. When nearing retirement, focus on preserving your capital by mitigating the impact of volatility on your investments and anticipating your future cash needs.
Pursuing a diversification strategy
Take a step back and ask: Does your current portfolio reflect your cash flow needs? Could your long-term financial plan withstand a sharp drop in Nike’s stock price? If you sold and paid the associated federal and state taxes, would your plan still stay on track?
Volatility poses a real challenge, especially when future spending needs are on the horizon. But with careful planning, it’s possible to stay focused on what matters most and avoid being rattled by short-term market swings. Market timing rarely works, and trying to outguess it often does more harm than good. The smarter path is to work with a team that can help you prepare, adapt, and move with clarity and confidence.
At Brighton Jones, we’re here to help Nike employees explore personalized diversification strategies that support their goals and values. Let’s start planning for what’s next, together.
Reach out to us today to start planning for your financial future.
This content is for informational and educational purposes only and should not be construed as individualized advice or a recommendation for any specific product, strategy, or course of action. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. This material is not intended to, and does not, create a fiduciary relationship under ERISA or any other applicable law. For individualized advice tailored to your specific circumstances, please consult with your adviser.
