Planning Around Concentrated Stock

A concentrated position can create meaningful upside and meaningful risk. The planning challenge is deciding how that exposure fits with taxes, liquidity needs and the rest of your wealth.

Understand the size of the exposure

Measure the position as a percentage of investable assets and overall net worth, then consider whether your employment, deferred compensation or business interests create additional exposure to the same company or industry.

Separate tax cost from investment risk

A large unrealized gain can make diversification feel expensive. Taxes matter, but the tax bill should be evaluated alongside the financial consequence of a large decline in a position that remains concentrated. Neither holding nor selling is automatically the correct answer.

Create a decision framework

Possible approaches can include staged sales, diversification over time, charitable planning or simply maintaining a position when the risk is appropriate for the investor. Each approach has tradeoffs. The relevant question is not how to eliminate every tax or every risk, but which combination is consistent with the investor’s objectives and circumstances.

Account for trading restrictions and compensation

Executives may face blackout periods, company trading policies, Rule 10b5-1 considerations or vesting schedules. Legal and tax professionals should be involved where applicable, and any transaction should comply with employer policies and securities laws.

Revisit the plan as circumstances change

A concentration level that was acceptable during accumulation may not remain appropriate near retirement, after a liquidity event or when family spending needs change. Review the position in the context of the entire financial plan rather than as an isolated investment.