managing concentrated
stock positions

Whether you receive equity as compensation, inherited a large position, or purchased a stock that soared in value, you now may find yourself with a concentrated holding that introduces unwelcome challenges.

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What is a Concentrated
Stock Position?

In general, holding 10% of your investment portfolio in one stock is known as a concentrated stock position. 

While the benefits of diversification are well recognized in the investment world, in practice, many find themselves with a significant portion of their portfolio concentrated in a single stock.

This situation is particularly common amongst corporate executives, who often accumulate large positions in company stock through equity compensation packages or long-term investment in their businesses.

what are the risks of concentrated positions?

  • Company-Specific Risk: investing too heavily in a single stock leaves your portfolio particularly vulnerable to company underperformance or changes in industry outlook.
  • Heightened Volatility: lack of diversification increases the volatility profile of your portfolio, which can result in larger, more severe drawdowns. 
  • Underperformance: most single-name stocks underperform their respective markets over the long run, which detracts from your portfolio's overall performance.

The Illusion of "Worsification"

Diversifying your portfolio might seem counterintuitive if you believe in the future prospects of your company. However, history has shown that individual companies are more likely to underperform the market over the long run. 

Single stocks vs. the market

Do Single Stocks Outperform Over the Long Run?

Single Stock Performance vs. the Market

Since 1990, only a third of US stocks outperformed the market over a 5Y rolling period. This figure drops to 29% and 21% over 10Y and 20Y periods, respectively.

Disclosures

Challenges with Diversifying

Many investors understand the importance of diversification but find themselves hindered by various legal, regulatory, and even personal challenges. However, these roadblocks, while formidable, are not insurmountable. 

EMOTIONAL ATTACHMENt

  • Comfort level with the investment
  • Fear of missing out on future gains
  • Loyalty to company

TAX LIABILITY

  • Often highly-appreciated, low-basis stock
  • Sale may result in a significant tax liability
  • Most prefer to hold stock to defer liability
regulatory
  • SEC rules and regulations
  • Employer terms and restrictions
  • 10b5-1 exemptions 

How do we solve this problem for clients?

personalized
diversification plans

We believe in a personalized approach to diversification, which starts with a thorough understanding of your unique personal and professional circumstances.

Familiarizing ourselves with this information allows us to design a clear and actionable diversification plan that's fully aligned with your goals.

Considerations May Include:

  • Your personal wealth objectives.
  • Gains and holding periods associated with your concentrated position.
  • Regulatory and legal implications specific to your holdings.
  • Potential tax implications associated with divestiture.

experience and
expertise

  • Regulatory Insight: Our experienced team is here to help you with the complexities and numerous regulations surrounding concentrated stock positions within company plans.

  • Customized Wealth Management: Our diversification plans are custom-built to align with your goals and provide a clear understanding of the path ahead. 

  • Overcoming Personal Hesitations: We understand the psychological barriers of modifying your approach to a familiar (and often profitable) investment. Our experienced team is here to provide the support and advice you need to feel comfortable and confident in your plan.

  • Informed Decision-Making: Knowledge is power, especially when it comes to investing. We provide value insights, data, and education to reduce uncertainty and empower your investment decisions. 

start a conversation

Schedule a free one-on-one consultation to speak to an advisor about your concentrated position.

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