Stock Concentration: Too Much of a Good Thing?
There are several ways an individual or family can end up with a concentrated stock position. Some of the most common include:
An executive at a publicly traded company receiving RSUs, ISOs, or other forms of equity compensation.
An early employee at a successful company that goes public or appreciates significantly in value.
An early investor in a stock that experiences substantial appreciation.
An inheritor of appreciated stock.
While a concentrated position is often described as a “risk,” it is usually the result of success. A holding that has appreciated enough to represent a significant percentage of your wealth can certainly create challenges, but it can also create tremendous opportunity if managed thoughtfully.
Before going any further, none of the following should be construed as investment, tax, or legal advice. Any decisions involving concentrated positions should be evaluated in the context of an individual’s broader financial, tax, and estate planning objectives.
Prior to discussing methods for managing concentration risk, it makes sense to first define what stock concentration risk actually is and identify ways to avoid it in the first place.
“Any holding that constitutes more than 10% of an investor’s portfolio” is the classic definition. It is also an incomplete one.
Scenario 1: A retired bank executive pays most of his living expenses with a $250,000 annual pension. In his brokerage account, he holds NVDA, KEY, BA, TSLA, and several index funds. Outside of his brokerage account, he owns physical gold and silver, a single-family rental property in his hometown, and a 50% partnership in several car washes across the state. In total, his NVDA position represents approximately 15% of his total net worth when accounting for both the individual stock and index fund weightings.
Scenario 2: A marketing manager at a small software company receives a salary and bonus tied to company performance. In her brokerage account, she owns CRM, MSFT, AMZN, META, and NOW. Outside of her brokerage account, she also invests in an SPV that purchases pre-IPO shares of private software companies. She also owns BTC and ETH. Her employer’s largest customer is Salesforce. In total, CRM represents roughly 10% of her total net worth.
Scenario 1 may appear more concentrated at first glance, but Scenario 2 could arguably carry greater overall risk. Factors such as asset correlation, liquidity needs, income sources, and industry exposure are often overlooked when discussing stock concentration.
The same concentration that creates substantial wealth can also create substantial vulnerability.
If we can move forward under the assumption that stock concentration is not inherently bad, but can certainly become harmful if unmanaged, let’s discuss ways to avoid it in the first place — assuming that aligns with your broader financial goals.
For employees receiving stock-based compensation, it can be helpful to establish guidelines around how much exposure you want to maintain over time.
For example:
You may choose to hold RSUs upon vesting while selling ESPP shares upon receipt
You may avoid purchasing additional company stock inside your retirement plan
Upper-level executives may establish systematic share sale plans (10b5-1 plans) to reduce concentration while remaining objective regarding timing and sale amounts
Investors can also establish position-size thresholds such as:
Not purchasing additional shares once a position exceeds a certain percentage of the portfolio
Rebalancing or trimming positions after they breach a predetermined concentration level
None of this is particularly complicated, but it does require planning and objectivity because you are effectively agreeing to part ways with something that is working.
Selling a stock that is making new all-time highs and dominating headlines can feel deeply counterintuitive in the moment, but it may be necessary if the objective is to avoid a concentrated position from developing in the first place.
For those who were not proactive in establishing rules earlier on, what options remain?
Sell the thing.
While taxes may consume a meaningful portion of the proceeds depending on your tax situation and state of residence, selling remains the simplest and most direct path toward reducing concentration risk.
Offset gains with losses.
To the extent qualified losses are generated elsewhere in the portfolio, they may be used to offset gains from selling portions of a concentrated position. Direct indexing and long-short direct indexing strategies can sometimes be useful tools for accumulating losses over time.
Hedge.
Investors may use other assets to reduce overall portfolio correlation by purchasing assets such as gold, bonds, managed futures, or other diversifying exposures. Protective puts and equity collars can also provide downside protection against severe declines while allowing investors to maintain ownership exposure. Exchange funds may offer another avenue for diversifying highly appreciated stock positions across a broader pool of holdings.
Create liquidity or generate income.
Concentrated stock positions may also be used as collateral for lending strategies. Covered call strategies and prepaid variable forward contracts can sometimes provide liquidity or income that reduces the financial anxiety associated with maintaining a concentrated holding.
In every example above, there are tradeoffs.
One solution may substantially reduce concentration risk but introduce additional complexity and expense. Another may be simpler and more cost-effective while leaving more concentration exposure than originally intended. Every strategy should be evaluated carefully within the broader context of an investor’s financial, tax, and estate planning goals.
The most overlooked approach is revisiting your goals and determining whether a concentrated holding should truly be viewed as a risk — or whether it may actually represent an opportunity.
Perhaps your income needs are already met through other sources and the position can simply be maintained and eventually transferred to heirs who may receive a step-up in basis at death. If you are making annual gifts, appreciated stock may also serve as an efficient gifting asset, allowing beneficiaries to determine whether to hold or sell based on their own financial and tax circumstances.
Existing charitable intent can also create compelling planning opportunities for concentrated stock positions. Donating appreciated shares or utilizing structures such as charitable remainder trusts may provide elegant solutions for reducing concentration while supporting philanthropic objectives.
In many cases, concentrated stock positions are evidence that something went very right. The key is understanding when continued concentration remains aligned with your objectives and when diversification, liquidity, or planning flexibility may become more valuable than additional upside.
Like most areas of wealth management, the “right” answer is rarely universal and almost always depends on context.
*The next blog post will focus on how business owners can address their concentrated holding.
