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2020 has been quite the year for IPOs:

The recent Airbnb IPO was another example of employee equity compensation creating a new wave of overnight millionaires.

If you’ve experienced a major windfall from an IPO, congratulations! It’s truly a life-changing event.

Here are some considerations for managing and protecting your new-found wealth:

The major gain in share price typically takes place when the IPO occurs. Once shares are traded in the secondary market, investors purchase shares based on future growth expectations. Traders purchase shares based on speculation in price movements.

Increase in valuation -> increase in expectations -> increase in expected volatility

Once your shares are traded in the secondary market, you’ve probably experienced your largest initial gain. That’s not to say your shares can’t continue to grow at a pace well above market returns; however, if history is a guide, the path post IPO is a bumpy one even for successful companies.

Post IPO remind yourself of the following saying: “Concentration gets you wealthy, diversification keeps you wealthy”

If you’re trying to speculate on your company’s share price growth post IPO, you can find a wide range of answers. I’d caution you to be skeptical of anyone’s price expectations, including your own. No one knows the path of an individual’s companies share price, especially over short time frames.

When dealing with highly concentrated stock positions, I recommend considering a strategy that minimizes future regret.

What does it mean to minimize regret for your new-found wealth? It means developing a financial plan focused on your long-term financial success and provides a baseline for a worst-case-scenario.

A worst-case scenario would be if your company’s share price became worthless, and you failed to diversify your wealth. While this scenario may be unlikely, especially in the short-term, you can minimize regret by establishing a portion of your investment portfolio that is diversified.

A diversified portfolio consists of combining a broad range of assets to increase your chances of building wealth over long time frames. Diversification is not a guarantee for future investment success, but it does allow you to make more reasonable assumptions for a range of outcomes.

In real-world terminology, it allows you to develop a plan to figure out how on track you are to financial independence. It’s impossible to develop a financial independence plan when most of your net worth is invested in a single company.

Owning most of your wealth in a single investment may make sense if you’re a Billionaire founder of a company. However, for Mainstreet investors like you and me, diversification is a practical, real-world strategy for preserving our wealth.

If you’re interested in strategies for determining how to diversify a concentrated stock position, check out one of my previous posts:

Seven Factors For Determining How To Diversify Concentrated Employee Stock Options

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