Concentrated Stock Position Strategies
A concentrated stock position is when an individual holds a significant portion of their wealth in a single stock or a small number of stocks. This can occur due to various factors, such as inheritance, stock options, or a successful investment. While having a concentrated stock position can be financially rewarding, it comes with risks and challenges.
Considerations for managing single stock exposure
What percent of your liquid portfolio is invested in a single stock?
Determining the percentage of your portfolio allocated to a single stock is essential for risk management. Consider your age, financial goals, and anticipated cash needs. If you are near retirement, limit concentration risk to preserve capital for upcoming lifestyle needs. Similarly, if you are saving for large purchases, like a house down payment, you want to mitigate risk. Setting a portfolio target of 5%–20% of liquid assets for company stock may promote discipline and diversification
How fast will a company’s stock position grow with upcoming vests?
Upcoming stock vests may significantly impact your portfolio allocation. If these vests push your company stock allocation above your target percentage, you must decide how much stock to sell or hold to stay within your desired range. One additional thing to consider when determining how much to sell or hold is the tax implications of either decision.
What other company exposure do you have?
Consider your total exposure beyond stock holdings. Do you receive a significant portion of your income from the company in the form of salary or through a deferred compensation plan? Additionally, assess if the company’s activities influence local real estate prices, which may indirectly affect your financial well-being.
Are there tax consequences of selling an individual stock position?
Selling a single stock may have tax implications, so assessing the exposure to capital gains and applicable tax rates is crucial. Strategically selling high-cost basis shares first may help mitigate tax consequences. It’s also important to evaluate your entire current and future tax picture: Are you expecting other capital gains? How might future income change and affect your capital gains tax rate with and without the disposition? Additionally, consider paring down exposure over several years to spread out the tax impact and minimize upfront tax liabilities.
Strategies for reducing single stock exposure
Single stock exposure may leave you vulnerable to market fluctuations and company-specific events. Diversification is critical to managing risk and ensuring a well-balanced portfolio.
Here are several strategies for reducing single-stock exposure, each with pros and cons.
#1 Sensitivity analysis
Before taking action, it may be useful to run a sensitivity analysis. By stress-testing a baseline financial plan, you may see how much risk a concentrated stock position introduces and the scale of changes needed to address it. This step helps clarify the potential downside of inaction and provides a framework for evaluating the strategies that follow.
#2 Sell 100% of the single stock holding at the current price
Selling all shares at the current price offers a straightforward solution to quickly eliminate single-stock exposure. This de-risks your portfolio, and the proceeds from the sale are known. However, consider the tax implications of selling all shares simultaneously, as capital gains taxes will be due in a single tax year. We often look to sell the highest-basis shares first to reduce the tax burden.
#3 Set a limit order to sell the stock at a specified price
Utilizing limit orders provides a way to capture higher prices. (NOTE: Limit orders do not limit losses.) There’s the possibility of excess upside price movement with this approach. However, there’s also a risk of missing out on selling if the stock price doesn’t reach the specified limit. Some investors may consider writing covered calls instead of setting limits.
#4 Incrementally sell shares on a predetermined schedule
Selling shares gradually over time may spread the tax impact while reducing exposure to a single stock. Market downturns could affect the overall effectiveness of this approach. If the stock price declines, you lose the potential benefit of tax planning. This strategy also aligns with situations where future income and savings patterns may naturally cause the concentration to decline as a percentage of the portfolio.
#5 Diversify via exchange fund
Exchange funds allow concentrated shareholders to diversify their holdings without triggering immediate tax consequences. Investors receive units of a partnership that owns a broad basket of securities intended to replicate an index. Nonetheless, exchange funds come with eligibility requirements and restrictions that may not suit all investors, including the need for qualified purchasers only and a seven-year lock-up period. It’s also important to note that while exchange funds solve the concentration problem, they don’t change your tax basis—you’re effectively deferring the tax bill until you eventually liquidate diversified but still highly appreciated holdings.
#6 Write covered calls
Generating income by writing call options against existing stock holdings is the main advantage of covered calls. However, this strategy also means forgoing upside stock appreciation while retaining downside risk. The income generated from covered calls may not always be meaningful enough to justify this trade-off. Clients often find themselves in three scenarios: wishing they had sold if the stock dives, regretting lost upside if it rises, or feeling the capital was underutilized if it stays flat.
#7 Fund charitable gift account
Donating appreciated stock to a charitable gift account may provide tax advantages while supporting worthy causes. Investors receive a tax deduction for the gifted amount and may avoid paying capital gains taxes, providing a double tax benefit. You may also consider front-loading/bunching charitable giving by funding DAFs with appreciated securities in higher income years, while granting the funds along to the final charity over years or even decades based upon your personal giving plan.
#8 Gift & Sell
If you gift appreciated stock to a family member or non-charitable beneficiary, the stock’s basis follows the gift. If the recipient is in a lower tax bracket, they may potentially sell shares at a lower capital gains rate, creating a tax-efficient way to transfer and liquidate wealth.
#9 No/Low-Cost Collar (Long Stock + Long Put + Short Call)
A collar locks in the stock price within a narrow range while deferring the sale to a future tax year. By buying a put close to the current price and selling a call to cover the cost, you may effectively lock in today’s value but wait to sell. This may give more time for tax-loss harvesting or offsetting gains in the following year. The trade-off is the opportunity cost of missing market gains while the collar is in place.
#10 Diversify via Leveraged Long/Short Separately Managed Account
This approach allows a concentrated position to be wound down tax-neutrally in as little as two calendar years through aggressive tax-loss harvesting. While offering powerful diversification, leveraged long/short strategies carry higher tracking error, higher management fees, and varying investment minimums.
#11 Qualified Opportunity Zones (QOZ)
Investors can reinvest capital gains into a Qualified Opportunity Fund (QOF) within 180 days of realizing a gain. Under the OBBBA (2025), the program has been made permanent. Starting in 2027, gains invested into QOFs are deferred until the fifth anniversary of the investment date, rather than a fixed deadline. Investors also receive a 10% basis step-up if the investment is held for five years, and gains from investments held for 10 years or more may be excluded from taxation altogether.
Defining your objectives (preserving wealth, generating income, or achieving growth), assessing your risk tolerance, developing a diversified asset allocation strategy, and monitoring and adjusting over time will ensure your concentrated stock positions align with your objectives.
This content is for informational and educational purposes only and should not be construed as individualized advice or a recommendation for any specific product, strategy, or course of action. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. This material is not intended to, and does not, create a fiduciary relationship under ERISA or any other applicable law. For individualized advice tailored to your specific circumstances, please consult with your adviser.
