What to Do With a Concentrated Stock Position

Many people build significant wealth through a single company’s stock, often their employer’s. Stock options, restricted stock units, employee stock purchase plans, founding a successful company or a fortunate early investment can result in a large portion of your net worth tied to one stock. While this concentration may have created your wealth, holding too much in one stock can put your financial future at serious risk.

Why concentration is risky

If that one company stumbles, your wealth can drop sharply. Even successful, well-established companies can face unexpected challenges, such as competition, technological change, regulatory issues, management problems, accounting scandals or economic downturns. History includes many examples of once-dominant companies whose stock prices fell dramatically or that went bankrupt entirely.

Individual stocks are generally much more volatile than diversified portfolios. A diversified portfolio spreads risk across many companies, so the decline of any single company has a limited impact. A concentrated position offers no such protection.

If the stock is your employer’s, the risk is compounded. Your job, income, benefits and savings could all be hit at the same time if the company struggles. Employees at companies that failed have sometimes lost both their jobs and much of their retirement savings simultaneously.

Why people hold concentrated positions

There are understandable reasons people hold concentrated positions. Many believe strongly in their company’s future, feel loyalty to their employer or founded the company themselves. Others are reluctant to sell because of the capital gains taxes they’d owe on large gains. Some face restrictions on selling, such as insider trading rules, lockup periods after an initial public offering or company policies. And emotional attachment, along with the fear of selling before the stock rises further, can make selling difficult.

Common diversification strategies

Selling gradually is one of the simplest approaches. Selling a portion of your position over time, such as quarterly or annually, can reduce risk steadily while spreading capital gains taxes across multiple tax years. A systematic plan removes the temptation to try timing the market.

A 10b5-1 plan is an option for corporate insiders who may have access to material nonpublic information. Insiders can set up a pre-arranged trading plan to sell shares on a predetermined schedule, which can provide a defense against insider trading allegations. Rules governing these plans, including cooling-off periods, have been updated in recent years.

Donating appreciated shares to charity or a donor-advised fund lets you avoid capital gains tax on the appreciation and potentially deduct the fair market value, within IRS limits, if you itemize. This can be an effective way to reduce a concentrated position while supporting causes you care about.

Gifting shares to family members, within gift tax rules, can also reduce concentration. Gifting to family members in lower tax brackets may result in lower capital gains taxes when they sell, though rules like the kiddie tax may apply for children, and recipients generally take over your cost basis.

Charitable remainder trusts allow you to contribute appreciated shares to a trust, which can sell them without immediate capital gains tax and provide you with income for life or a set term, with the remainder going to charity.

Exchange funds let you pool your shares with other investors’ concentrated stock positions in exchange for a share of a diversified fund. This provides diversification without immediately triggering capital gains taxes. However, exchange funds generally require long holding periods, often seven years, accredited investor status and significant minimums, and they come with fees.

Hedging with options strategies, such as buying protective puts or using collars, can limit downside risk while you continue to hold shares. These strategies can be complex and involve costs, and they may have tax implications.

Tax considerations

Selling appreciated stock may trigger capital gains tax. Holding shares more than a year usually qualifies gains for lower long-term capital gains rates, which are generally much lower than ordinary income tax rates. High earners may also owe the net investment income tax.

Tax-loss harvesting elsewhere in your portfolio, selling other investments at a loss, can offset some gains from selling your concentrated position. Spreading sales across multiple years can help keep you in lower tax brackets.

Equity compensation has its own tax rules, such as for incentive stock options and RSUs, which affect the timing and amount of taxes owed.

Holding appreciated stock until death may result in a step-up in cost basis for heirs, eliminating capital gains taxes on the appreciation during your lifetime. However, this strategy means holding concentration risk for the rest of your life, which may not be wise.

Set a target and a plan

Many advisers suggest limiting any single stock to a modest share of your overall portfolio, often citing figures like 10% or less, though the right level depends on your circumstances, risk tolerance and financial goals.

Choose a target allocation and a plan to get there, such as selling a set percentage each quarter until you reach your target. Writing down your plan and the reasons behind it can help you stick with it when emotions run high.

Get advice

Managing a concentrated stock position involves investment, tax and estate planning considerations. A fee-only adviser and tax professional can help you evaluate your options, understand the tax implications and build a diversification plan tailored to your situation. If you’re a corporate insider, consult your company’s legal or compliance department about trading restrictions.