Commentary · Commentary
The Risk of a Concentrated Stock Position
Written by the William Allan team · Published
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If a large share of your net worth sits in a single company's stock, you're carrying company-specific risk that diversification can help reduce.
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. A large position can develop without a deliberate decision to concentrate. 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 company-specific setback can have an outsized effect on your financial picture. Diversification can reduce that exposure, although a diversified portfolio can still suffer substantial losses from broad market shocks.
What actually complicates the fix
Diversifying a large position can involve several obstacles:
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 over multiple years may spread gains across tax years. Whether that reduces total tax depends on income, tax rates, and future prices; waiting also prolongs concentration risk.
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. Where company policies and securities laws permit, a hedge may reduce some downside exposure. It can also limit upside, cost money, and trigger tax rules, including constructive-sale treatment. Sale restrictions may also restrict hedging. Confirm the legal, company-policy, and tax requirements before considering one.
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
Alongside the portfolio’s return, review the percentage of your net worth in a single company and what a substantial decline in that holding would mean for your plan.
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.
Sources: FINRA concentration-risk guidance, SEC hedging-policy guidance, and IRS Publication 550.
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.