Commentary · Commentary
The Risk of a Concentrated Stock Position
Written by the William Allan team · Reviewed by Jason Crawshaw, CPA ·
If a large share of your net worth sits in a single company's stock, you're carrying a risk that most diversified investors never have to think about.
It rarely happens on purpose. Years of equity compensation vesting on schedule. A founder's stake that never got trimmed. A long career at one company, with a 401(k) match paid in company shares on top of everything else. Each individual decision made sense at the time. The cumulative effect is a portfolio where one company's earnings call can move your entire net worth.
Why this creeps up on people
Concentration builds slowly, which is exactly why it's dangerous. Nobody wakes up one day and decides to put forty percent of their net worth in one stock. It happens through inertia: shares that vest and just sit there, a position nobody got around to trimming during a good year, a company you believe in so you never questioned holding more of it than a diversified investor would.
The risk isn't that the company is bad. Often it's a company doing quite well, which is exactly why the position grew large enough to matter. The risk is structural: a single company's bad quarter, a leadership change, an industry-wide shock, any of it can now move your entire financial picture in a way a properly diversified portfolio never would.
What actually complicates the fix
If diversifying were simple, most people would have done it already. The real obstacles are usually:
Tax consequences. Selling a highly appreciated position can trigger a substantial capital gains bill in a single year. Selling all at once to fix concentration risk can create a different problem: a large, avoidable tax event.
Vesting and blackout restrictions. Executives and employees with equity compensation are often restricted in when they can sell, tied to vesting schedules, insider trading windows, or company blackout periods around earnings.
Emotional attachment. It's hard to sell shares in a company you helped build or have worked at for a decade. That attachment is understandable and worth acknowledging, but it isn't a substitute for a risk assessment.
Approaches that address this without an all-or-nothing decision
Staged diversification. Rather than selling everything at once, trimming the position over multiple years and multiple tax brackets can meaningfully reduce the tax hit compared to a single large sale.
Coordinating with vesting schedules. For executives with ongoing equity compensation, a diversification plan can be built around future vesting dates rather than fighting against restricted windows.
Protective strategies for restricted positions. For shares that can't be sold right away, certain hedging strategies can reduce downside exposure without triggering a sale. These carry their own costs and complexity and aren't right for every situation, but they exist for exactly this problem.
Charitable strategies for appreciated stock. For those who are charitably inclined, donating appreciated shares directly (rather than cash) can reduce a concentrated position while avoiding the capital gains that a sale would trigger.
Tax-loss harvesting elsewhere in the portfolio. Losses realized in other parts of a portfolio can sometimes offset gains recognized when trimming a concentrated position, softening the overall tax impact of diversifying.
The question worth asking
Most people can tell you their portfolio's overall return. Fewer can tell you what percentage of their net worth sits in a single company's stock, or what would happen to their financial plan if that one holding dropped by half.
If you're not sure how concentrated your position actually is, that's usually the first conversation worth having, before deciding what, if anything, to do about it.
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Informational purposes only. Not investment, tax, or legal advice. Strategies involving concentrated stock positions, including hedging and charitable giving strategies, carry their own risks, costs, and tax consequences and are not suitable for everyone. Consult a qualified tax professional regarding your specific situation. William Allan is an investment adviser registered with the SEC; registration does not imply any specific level of skill or training.