Managing Concentrated Stock Positions: Protecting and Growing Your Wealth

Holding a large portion of your investments in a single stock (known as a concentrated stock position) happens more often than you might realize. Maybe you accumulated shares from your employer, inherited them, or simply had an investment that performed incredibly well. While these positions can significantly increase your wealth, they also come with unique risks and opportunities.

If the stock price climbs, it’s great news—but if it suddenly drops due to unexpected events or company-specific issues, your net worth could take a major hit. That’s why it’s so important to manage or diversify these concentrated positions thoughtfully to protect your financial future.

Here are a few smart strategies you can consider:

1. Gradual Diversification: One simple and effective method is gradually selling small portions of your stock regularly over time. This lets you steadily diversify your investments while minimizing the tax impact. A disciplined schedule also helps remove emotions from your investment decisions, keeping stress levels down. Talk to your Allworth advisor to see how this fits into your overall tax strategy.
2. Direct Indexing: Direct indexing involves slowly replacing your concentrated stock with a customized set of individual stocks that closely match a specific market index. This method allows you to offset gains by harvesting losses from individual stocks, improving your tax situation—especially if your account is taxable. Plus, you can tailor the portfolio to match your personal preferences or values.
3. Collar Strategies: Collar strategies involve using options to protect your stock. Specifically, you sell call options (which generate income) and use that income to buy put options (which limit your potential losses). Think of it as setting both a floor and a ceiling for your stock’s price, managing your risk effectively. Just be sure to carefully consider the potential future performance of your stock and tax consequences.
4. Charitable Giving: Giving your highly appreciated stock directly to charity or through a donor-advised fund is a meaningful way to diversify your position. It helps you avoid paying capital gains taxes, lowers your overall tax bill, and lets you support causes you care deeply about. You’ll also get immediate tax deductions based on your stock’s current value.
5. Exchange Funds: Exchange funds let investors swap their concentrated stock for shares in a diversified portfolio created from the concentrated positions of other investors. It’s a tax-efficient way to diversify since you’re exchanging shares rather than selling them outright. Keep in mind, exchange funds usually have minimum investment requirements and holding periods, so it’s important to evaluate if they're the right fit for your needs.

No matter what strategy you choose, it should align closely with your tax situation. Concentrated positions often have significant unrealized capital gains, so it’s vital to understand how each decision impacts your taxes. Working closely with your advisor on tax-loss harvesting, strategic timing of sales, and using tax-advantaged accounts can greatly reduce your overall tax bill.

Even after diversifying, regular portfolio rebalancing—periodically adjusting your investments to stay aligned with your goals—helps protect you from unnecessary risks and keeps your investment strategy stable.

Also, don’t underestimate how your own emotions or biases can affect managing concentrated stocks. It’s natural to have emotional ties or feel hesitant to make changes. Recognizing these biases and working closely with your advisor to create a structured plan can help you make clear, rational decisions that support your long-term financial goals.

Remember, the best solution is the one that fits your specific needs and values. At Allworth, we’re committed to helping you feel confident in your financial decisions. If you’re holding concentrated stock and want a clear plan to manage it, our team is ready to guide you. Taking proactive steps now will help you protect and grow your wealth well into the future.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.