Back to InsightsBy Brett Kinzel, Senior Vice President & Senior Portfolio Manager
For some investors, a single stock can grow into a significant portion of their wealth.
Shares can accumulate through years of employment, equity compensation, business ownership, or long-term investment success – and what began as a relatively modest holding can become one of the largest assets on a personal balance sheet.
Success can raise important questions about the future. How much of your wealth should remain tied to a single company? How much flexibility would come from broadening the sources of wealth that support your family, retirement, charitable interests, or legacy goals?
A concentrated stock position is not always viewed the same way as other investments. It may be tied to a career, a company, or a period of life marked by hard work and opportunity. That connection can make diversification feel more complicated than a typical portfolio decision.
Diversification decisions often involve considerations that extend well beyond the stock itself, including taxes, liquidity needs, retirement plans, charitable interests, and family priorities.
Looking Beyond the Position
A concentrated stock position can influence many parts of a financial life, including retirement plans, spending decisions, estate considerations, charitable goals, and family priorities.
Before making changes, it can be helpful to understand what role the position plays within the broader picture:
- How much of my net worth does the position represent?
- How much liquidity is available outside the stock?
- Which future goals depend on the continued performance of the shares?
- How would a significant decline affect other priorities?
These questions help clarify both the opportunities and risks associated with a concentrated position.
Keeping Taxes in Perspective
Selling a highly appreciated position can trigger substantial capital gains taxes, particularly when gains have accumulated over many years.
In some situations, the tax cost of selling can become so significant that it overshadows other important considerations. A position that represents a large share of a family’s wealth continues to grow, not necessarily because it remains the preferred investment, but because the tax consequences of reducing it feel difficult to accept.
Concerns about taxes can sometimes lead investors to postpone action. Taxes deserve careful consideration, but they should be evaluated alongside investment risk, liquidity needs, and long-term financial goals.
Diversification Without Disruption
Diversification is intended to reduce dependence on any single outcome and limit the influence one position can have on a family’s financial future.
There is no single approach that fits every situation. The appropriate strategy depends on the size of the position, tax considerations, charitable interests, family priorities, and the role the shares play within the broader financial picture.
You may consider:
- Systematic Selling
A disciplined selling schedule can help remove the pressure of trying to time the market or identify the perfect exit point. While selling appreciated shares in a taxable account will likely generate capital gains taxes, there may be opportunities to offset some of that liability by selling underperforming investments in your portfolio to harvest tax losses and using a direct indexing separately managed account (SMA) to systematically harvest losses.
Gradually selling shares over months or years and reinvesting the proceeds into a diversified portfolio can help spread tax liability over time while steadily reducing concentration risk.
- Charitable Giving Strategies
For investors with charitable goals, donating appreciated securities can be more tax-efficient than giving cash.
Contributing shares to a qualified charity or donor-advised fund (DAF) may help avoid capital gains taxes on the donated assets while generating a charitable deduction of up to 30% of adjusted gross income (AGI).¹
A charitable remainder trust (CRT) enables you to contribute appreciated shares, receive income payments, and direct the remaining assets to designated charities. While annual distributions are taxable, recognizing gains gradually may provide greater flexibility than triggering a large tax liability all at once.
- Strategic Gifting
In some cases, gifting appreciated shares to family members or trusts can support your wealth transfer goals. However, gifted assets generally retain their original cost basis, meaning recipients may owe capital gains taxes on appreciation that occurred during your ownership.
Inherited assets, by contrast, typically receive a step-up in basis at death, potentially reducing or eliminating capital gains taxes on prior appreciation.
When evaluating concentrated stock gifts, it is important to weigh the tax benefits of holding the asset against the advantages of transferring wealth earlier, particularly if beneficiaries are in lower tax brackets or have longer investment horizons.
- Advanced Planning Techniques
Some high-net-worth investors may consider more advanced strategies.
For example, exchange funds allow investors to contribute concentrated stock to a pooled portfolio, potentially achieving diversification without triggering an immediate capital gains tax event.
Hedging strategies – such as purchasing put options – can also help protect against downside risk in a concentrated position.
Given the tax, cost, and implementation considerations involved, these strategies should be evaluated carefully with your advisory team.
From Concentration to Long-Term Security
A concentrated stock position may have played an important role in building wealth.
But decisions about whether to hold, sell, gift, donate, or hedge shares can influence taxes, retirement plans, estate considerations, charitable goals, and family priorities.
Thoughtful planning begins with understanding those tradeoffs and the role the position plays within the broader financial picture.
Let’s discuss how 1280 Financial Partners can help evaluate the opportunities and tradeoffs associated with a concentrated stock position.
Sources
1 https://www.nptrust.org/what-is-a-donor-advised-fund/daf-tax-consideration/