Often, when we work with new clients, we find that their portfolios include stock holdings that constitute 10 percent or more of an individual stock. Why does this happen and what added risks does it create for their investment portfolio?

Excessive holdings of a particular stock can happen for a variety of reasons. In many cases, the stock is that of the company the client works for. They may have a generous stock plan that allows them to purchase company stock at a discount (often 15 percent). They may be required to invest a portion of their 401(k) account in the company stock. They may have received and executed stock options for their company’s stock or they may have just purchased the stock because they were confident in the direction the company was going and believed the stock would do well.

When times get tough, your company may be forced to lay you off or offer an early retirement. At such times the company stock is likely depressed in value just when you may need it most.

In other cases, clients may have inherited a chunk of stock from their grandparents or perhaps from Aunt Lillie. The stock may have been in the family for years and they have an emotional attachment to it. Aunt Lillie did well by it. How could it possibly drop in value?

In other cases, clients have purchased the stock themselves and held it for many years. The stock may have split several times, pays good dividends and they are sure it will continue it meteoric rise. They can’t stand the thought of missing out on it’s continued growth.

Whatever the reason, all of these situations can lead to added risk for your portfolio. We recommend clients keep their holdings of individual stocks below 10 percent, and preferably 5 percent of their total portfolio’s value. Doing so can protect them from unanticipated risks.

A case in point is Hewlett-Packard Company’s stock which has fell 8 percent in just one day (August 9th), following the news of the resignation (firing?) of their CEO, Mark Hurd. Mr. Hurd was reportedly “fired” by the H-P’s Board for ethical issues involving improper expense reports discovered when a female contractor filed a sexual harassment suit. Mr. Hurd had improved H-P’s operating margin from 6 percent when he took over to 12 percent as of last quarter.

It seems likely that the stock will recover once a suitable replacement is named. Yet in the interim, it’s unclear what the stock will do, especially if the economy continues to struggle. If someone was over-weighted in H-P stock, they may be emotionally driven to sell out of fear of losing more or perhaps can’t wait for a recovery because of an urgent need for cash.

Who could have anticipated such an event? Yet, history tells us that stocks tumble unexpectedly more often than we might think (Think BP, for example). It’s easy for a stock over-weighting to creep up on you. So take some time periodically to check out your portfolio to see if you are exposed to this often-overlooked risk.