How Do I Manage a Concentrated Stock Position?

Holding a concentrated stock position — where a significant portion of your wealth is tied up in a single stock — can present both substantial opportunities and risks. While the potential for high returns is attractive, the lack of diversification can expose you to market volatility and company-specific risks. Managing this exposure through the following strategies can help protect your wealth: 

• Collar options
• 10b5-1 plans
• Exchange funds
• Charitable remainder trusts
• Tax-loss harvesting

If you need personalized investment guidance, Avidian Wealth Solutions can help develop a plan tailored to your financial goals.

What does concentrated stock mean?

A concentrated stock position occurs when a single stock makes up a significant portion of an investor’s portfolio. This can happen due to long-term holding of employer stock, inheritance, or strong performance of a particular investment over time. While some investors may welcome the growth, others may be concerned about the risks associated with overexposure to one asset.

What percentage is considered a concentrated stock position? 

Though there is no strict definition, financial professionals generally consider a stock position concentrated if it exceeds 10 – 20% of an investor’s overall portfolio. However, the level of acceptable concentration depends on individual risk tolerance and investment objectives.

For example, a retired executive with 40% of their wealth tied up in company stock may be riskier than a younger investor with a longer time horizon.

What are some risks of a concentrated stock position?

Holding a concentrated stock position exposes investors to several key risks, including:

• Market volatility: A single stock can experience sharp fluctuations, impacting overall wealth.
• Company-specific risk: Poor performance, regulatory issues, or management changes can lead to significant losses.
• Liquidity concerns: Selling a large portion of stock at once can impact pricing, especially in smaller companies.
• Tax implications: Liquidating shares may trigger capital gains taxes, reducing net returns.
• Emotional bias: Investors may develop an attachment to a stock, making it difficult to sell even when prudent.

Consider an executive at a tech company who holds 50% of their net worth in company shares. If the company faces regulatory scrutiny, the stock price could decline significantly, causing a disproportionate loss of wealth.

How to diversify a concentrated stock position

Investors can use several risk management strategies for hedging a concentrated stock position, reducing exposure while maintaining potential upside.

1. Collar strategies

What is a collar strategy for concentrated stocks? A collar strategy involves purchasing protective put options while selling covered call options to limit downside risk at little to no cost. This strategy helps protect against significant losses without requiring an immediate sale of shares.

Take, for instance, an investor with $1 million in stock might buy a put option with a strike price of $900,000 while selling a call option at $1.1 million. This creates a safety net that can prevent them from losing more than 10% but capping their upside at 10% as well.

Any options strategy requires a skilled manager who understands its complexities, making it essential to work with a trusted professional.

2. 10b5-1 plan

A 10b5-1 plan is a prearranged trading plan that allows executives and insiders to systematically sell stock over time, reducing risk while avoiding accusations of insider trading. These plans establish predetermined selling points based on price, volume, or timing.

An executive might hypothetically set up a plan to sell 10,000 shares per quarter as long as the stock price remains above a certain threshold. This disciplined approach helps avoid impulsive decisions and tax inefficiencies.

3. Exchange funds

An exchange fund for concentrated stock positions allows investors to contribute their concentrated stock in exchange for a diversified pool of stocks, reducing individual stock risk while deferring capital gains taxes.

If an investor holds $2 million in a single stock, they can contribute it to an exchange fund with other investors. In return, they receive a diversified portfolio of different stocks, mitigating risk while maintaining market exposure.

Exchange funds often have higher fees and sometimes lockup periods that reduce liquidity when compared to a diversified mutual fund or exchange traded fund (ETF).  Consider these factors as part of the tradeoff of accessing an exchange fund.

4. Charitable remainder trusts (CRT)

A charitable remainder trust allows investors to donate stock, receive a charitable tax deduction, and secure income for life. Over time, the trust sells the stock, reinvesting proceeds into a diversified portfolio. This strategy benefits both the investor and the chosen charity.

For example, an investor with $5 million in company stock donates $1 million to a CRT, reducing taxable income while generating annual income from the trust’s investments.

A CRT would face similar risks as the donating investor once the stock is received.  Like the donating investor, the CRT may consider a risk mitigation strategy.  However, once the stock is donated, it is no longer a concentration risk to the donating investor portfolio.

5. Tax-loss harvesting (TLH)

A gradual selling strategy combined with tax-loss harvesting can help offset gains with losses elsewhere in the portfolio. Investors can minimize capital gains tax burdens by spreading sales over multiple tax years.

Consider this: an investor with $3 million in a single stock sells $500,000 annually while offsetting gains with losses in other investments. This approach manages risk efficiently while keeping tax consequences in check. Tax-loss harvesting, when applied systematically over time, can provide low cost market exposure and tax efficiency.  However, TLH should be thought of as a long-term exit plan.  It does not diversify risk to a concentrated position in the short term.

Considerations for employer stock options and RSUs

Many high-net-worth individuals accumulate concentrated stock positions through employer stock options or restricted stock units (RSUs). While these compensation forms can be lucrative, they require careful planning.

Handling stock options

Stock options come in two main forms: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). ISOs may have favorable tax treatment, while NSOs are taxed at ordinary income rates upon exercise. Proper timing of option exercises can help minimize tax burdens and diversify holdings efficiently.

Managing RSUs

RSUs typically vest over time, meaning employees gradually receive shares. Instead of holding all RSUs upon vesting, a strategic approach may involve selling a portion immediately and reinvesting the proceeds into a diversified portfolio.

For example, an executive receiving 10,000 RSUs annually could sell 50% each year to manage concentration risk while benefiting from company growth.

Manage your investment risk with professional guidance from Avidian

Managing a concentrated stock position requires strategic planning to balance risk, reward, and tax implications. As a trusted fiduciary advisor with decades of experience managing complex portfolios, Avidian Wealth Solutions helps clients navigate these critical decisions with chosen confidence. 

Whether through hedging strategies, structured selling plans, or tax-efficient diversification methods, our investment risk management strategies can help you plan to preserve your wealth.

If you’re looking to plan to manage a concentrated stock position effectively, contact us today at our Austin, Houston, Sugar Land, or The Woodlands locations to explore your options.

More Helpful Articles by Avidian: 

• How to Build a Volatile Market Strategy
• Top Strategies for Maximizing Endowment Performance
• Why Entrepreneurs Should Rewire, Not Retire
• What Is Portfolio Stress Testing?
• Building a Legacy: Wealth Transfer Strategies for Family Offices

---

Please read important disclosures here