Concentrated Stock Strategies: Manage Risk, Minimize Tax & Diversify

It’s not unusual for one stock to take center stage in your portfolio. 

Maybe you’ve built it up through years of company stock awards. Maybe it came to you through an inheritance. Or maybe you picked a winner early, and its growth has far outpaced everything else you own.

That kind of success feels great, but it also comes with a catch: when too much of your wealth is tied to a single company, your financial future can hinge on forces you can’t control. 

When your stocks are too concentrated, today’s gain can quickly turn into tomorrow’s loss. Add in the tax considerations of selling and the lack of diversification, and you’ve got a situation that calls for thoughtful planning and consideration.

In this article, we’ll look at what defines concentrated stock positions, the risks they can pose, and proven strategies to help you manage those risks while keeping your long-term goals on track.

What Is a Concentrated Stock Position?

A concentrated stock position occurs when 10% or more of your total portfolio value is tied to a single stock. Once you have that much of your wealth invested into a single stock, that company’s performance can meaningfully impact your net worth.

There are many ways investors wind up in this position. You may have used employer stock awards like RSUs, stock options, or employee purchase programs. You might have received an inheritance of a large single-stock holding. Or, you may have experienced rapid stock appreciation when an early investment takes off.

A concentrated stock position is not inherently bad, but the lack of diversification poses certain risks. If something happens to that one company, your portfolio may feel the hit much harder than the broader market.

Why Concentrated Stock Positions Carry Unique Risks

Even well-managed companies can be caught off guard by market events beyond their control. New government policies, disruptive technologies, and shifting market trends can affect anyone: 

• Every U.S. stock price has fallen at some point.
  
• Over the long term, about 75% of those never returned to their previous highs.
  
• In contrast, the broad market has recovered from every single major downturn in history.
  

Another risk that is often overlooked is the fact that individual stocks tend to lack persistence. The stock that’s beating the market today is likely to underperform in the future.

Think about Sears or Kodak. They were both household names at one point, and both were early leaders in their industries. Sears was once America’s most recognized retail giant. Kodak invented the digital camera. But ask any teenager today what those companies did, and you’ll likely get blank stares. 

This risk doesn’t mean you need to panic and sell immediately. You simply need to decide on a plan to manage risk while still capitalizing on the advantages your current portfolio has. 

Concentrated Stock Position Strategies 

Managing a concentrated stock position takes balance. You’ll want to find a strategy that protects your gains, minimizes your taxes, and gradually moves your portfolio toward more diversification. Here are a few of the most effective ways to manage a concentrated stock position. 

Using Dynamic Protective Orders to Reduce Risk

Dynamic protective orders act like a moving safety net. You choose a drop in value (either a percentage or dollar amount) that is acceptable to you, and if your stock price falls to that level, a sell order is triggered.

This strategy is dynamic because if your stock rises, the downside protection level rises with it. This locks in more potential gains over time.

• Advantages: Free to set up, extremely flexible, and automatically adjusts to market movements.
• Considerations:  Sells can happen at any time, so the timing of recognizing gains is harder to control.

Direct Indexing for Personalized Diversification

Direct indexing replaces a single-stock holding with a carefully constructed portfolio of individual stocks. Unlike an index fund, you directly own each stock. That means you have the opportunity to exclude certain companies or sectors to align your investments with your personal values. 

This approach also supports tax-loss harvesting, so you can strategically sell losing positions to offset gains. 

• Advantages: Offers personalization, values alignment, and ongoing tax management opportunities.
• Considerations: Can involve higher costs and administrative complexity compared to traditional funds.

Charitable Gifting of Appreciated Stock

Donating appreciated shares directly to a qualified charity can be a tax-efficient way to reduce concentration risk while making a meaningful impact. 

This strategy allows you to claim a deduction for the full fair market value of the shares and avoid paying capital gains taxes on their appreciation. It works especially well when charitable giving is already part of your long-term plan.

• Advantages: Provides a significant tax benefit while supporting causes you care about.
• Considerations: Requires coordination with your overall philanthropic goals.

Exchange Funds for Immediate Diversification

An exchange fund pools concentrated stock holdings from multiple investors, giving each participant shares in a diversified portfolio without triggering immediate capital gains taxes. 

• Advantages: Immediate diversification and tax deferral without an upfront sale.
• Considerations: Multi-year holding periods and accredited investor qualifications may apply.

Which Concentrated Stock Strategy Is Right for You?

There’s no one-size-fits-all approach to diversifying a concentrated stock position. You could even combine multiple strategies. For example, you could choose to: 

• Protect against near-term downside with dynamic protective orders.
  
• Gradually diversifying through direct indexing.
  
• Use charitable gifting for both impact and tax efficiency.
  

The most important thing to focus on is proactive, integrated planning. It’s always best to make moves with your current needs and your long-term vision in mind.

Final Thoughts

Remember, your concentrated stock position is a reflection of some form of success. You likely arrived here through career achievement, smart investing, or family legacy. The goal now is to preserve that success while positioning yourself for a secure future.

At SK Wealth, we’ve been helping clients navigate complex investment decisions for over 25 years. Through our Integrated Financial Advantage™ process, we create strategies that align with your values, goals, and tolerance for risk. We’ll help you manage concentrated positions with confidence and make sure your wealth is truly serving you.