The article “FP Answers: What should an investor do if they own a lot of shares in one company?” was originally published in Financial Post on May 5, 2023, By Julie Cazzin with Andrew Dobson.

There is a significant amount of risk in having 50% of your investments in a single company.

Q: I have worked for a technology company for 12 years and earn roughly $80,000 annually. I have invested solely in its stock for the past 12 years and hold those shares in a non-registered investment account. I have made good gains on the shares and they’re now worth about $300,000 — roughly half of my financial net worth (excluding my principal residence). Should I be selling some of these shares and diversifying my stock holdings? If so, should I bite the bullet on the income tax payable every year and then put this money in my registered retirement savings plan (RRSP) or tax-free savings account (TFSA) in a simple balanced exchange-traded fund (ETF)? I have about $150,000 in unused RRSP contribution room and $30,000 in unused TFSA room. — Rita G.

FP Answers: Rita, diversification is a concept that is crucial to successful long-term investing and should certainly be in focus based on your situation. One common approach is that once a portfolio of stocks surpasses 20 to 30 holdings, further diversification by adding another stock may be of little value. The rationale here is that you cannot “diversify away” systemic risk.

Although risk can be reduced through diversification across categories such as sector, style and market cap, stocks will always be subject to systemic risks that affect the entire market. Think of the Great Depression or the COVID-19 pandemic as examples of system-wide crises.

If an investor needs 20 stocks at minimum for diversification, that suggests any individual holding should not exceed five per cent of your total investment portfolio. This rule is consistent with the 20-stock idea, as a five-per-cent allocation to 20 stocks would account for 100 per cent of a portfolio.

In this scenario, a company-specific event that negatively affects its stock price would limit your exposure to five per cent of your portfolio, which is significantly lower than your current 50-per-cent allocation to your company’s shares. There may be situations where an overconcentration pays off — that is, when the stock has outsized outperformance — but that risk may not be advisable.

It sounds like you have been buying shares of your employer for many years. Some companies offer matching contributions or a discounted share purchase price to entice employees. Companies may even pay bonuses in shares or issue other share-based compensation such as stock options or restricted share units. Employees often feel more comfortable investing in shares of their employer because it is a business they know and understand.

As a result, an employee may end up in a situation where they have heavy exposure to a company’s financial performance by virtue of owning shares and by being employed by the company. In the event of a company-specific event, risks include a reduced bonus, a layoff or a steep decline in the stock price. There is a significant amount of risk having 50 per cent of your investments in a single company, Rita.

If your employer offers perks to buy company shares, it makes sense to take advantage of these, but ensure you have a plan on how to approach these funds over time. For example, you could choose to sell your employer’s shares on a regular basis. You could also sell based on when the shares reach a certain percentage of your overall portfolio.

Check to see if you must hold the shares for a certain period of time to avoid losing any company-matching contributions. As you sell, you can use the proceeds to fund RRSP or TFSA contributions if appropriate. And, most importantly, you can diversify into other investments.

Taxation is an important consideration in your question as well. If the shares are in a taxable non-registered account, you could use your accumulated RRSP contribution to offset the taxable capital gains in years when you sell the stock. This could be a good way to neutralize the effect of selling these shares and offset a capital gain that could otherwise push you into higher tax brackets.

If you are close to retirement, you could time the capital gains for years where your income is expected to be lower. You should also find out if you are able to buy these shares via a TFSA or RRSP through your work program. This could be a way to allow any growth in your shares to occur on a tax-free or tax-deferred basis instead of taxable in a non-registered account.

In summary, Rita, consider reducing your exposure because it is quite high. Figure out if there is a particular holding period to consider to avoid losing any company-matching shares if applicable. RRSP contributions could offset the tax hit from selling and consider buying these shares in an RRSP or TFSA going forward.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at