Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial Planner

Imagine building wealth over decades, only to have a single stock threaten it.

That's the risk many high-net-worth individuals face, especially first-generation wealth builders and corporate executives.

Whether the stock comes from compensation, an inheritance or company loyalty, holding too much of one position can put your financial future at risk.

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Concentrated positions, in which a single holding makes up a large portion of your portfolio, often go unnoticed until it's too late.

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Market volatility and complex tax rules can make it difficult to unwind these positions without triggering a significant capital gains bill.

Before you face an unexpected tax hit, here's how to tell if you're too concentrated and what you can do to reduce your risk.

The real risk of overconcentration

When one stock makes up more than 20% to 25% of your total investment portfolio, you're in potentially dangerous territory. Even if the stock performed well in the past, overexposure could subject you to greater risk than you're willing to tolerate.

When focusing your investment on one specific company, you not only face potential risk associated with the broader market, but you also face company-specific risks.

A dip in market value due to company-specific issues, such as a management scandal or regulatory shift, can hit your portfolio hard.

If you work at the company, the risk doubles. A single event could cause job loss and portfolio decline, straining cash flow and savings.

There's also a behavioral dimension. Loyalty and pride in a winning stock can make it hard to let go. That emotional attachment can cloud judgment, especially when the tax implications of selling are misunderstood or ignored.

Why selling isn't so simple

The biggest hurdle to diversifying a concentrated position is the capital gains tax.

If you're sitting on years of growth, selling even part of your holding could trigger a significant tax bill. This could push you into a higher bracket and impact your Social Security, Medicare premiums or eligibility for certain deductions.

Unfortunately, many investors don't factor in the ripple effects. Running tax projections and modeling different sale scenarios in advance can help reveal the full impact and inform a more strategic, phased approach to diversification.

Four powerful ways to diversify without getting crushed by taxes

You don't have to sell everything at once or go it alone. These four underutilized strategies can help reduce exposure to a single stock while managing tax liabilities.

1. Exchange funds

These private investment vehicles let you swap your concentrated stock for shares in a diversified pool of equities without triggering immediate capital gains.

Exchange funds often have a holding period, typically seven years, and are only available to accredited investors, usually those with $5 million or more in investable assets.

They are best for investors who want diversification but don't need access to their funds right away.

2. Charitable remainder trusts (CRTs)

If philanthropy is important to you, a CRT can be an effective tool.

• You donate your appreciated stock to a charitable trust
• The trust sells the stock tax-free and reinvests the proceeds
• You receive an income stream for life or for a set number of years
• The remainder goes to charity at the conclusion of that time period

This option provides a path to immediate diversification, a charitable tax deduction and ongoing income.

However, it's irrevocable. Once the stock is donated, you can't change your mind or access the full principal later. It's also not ideal for those who want to leave the assets to heirs.

3. Direct indexing

Direct indexing allows you to mimic the performance of a broad index, such as the S&P 500, by purchasing the individual securities within it. You keep your concentrated stock and surround it with other holdings that create a more balanced, tax-aware portfolio.

You can also harvest capital losses from underperforming stocks to offset gains as you gradually reduce your exposure. It's a flexible and efficient way to move toward diversification without triggering unnecessary taxes.

4. Donor-advised funds (DAFs)

If you already donate to charity, a donor-advised fund (DAF) can be a smart tool. You contribute appreciated stock, receive a deduction based on the fair market value and avoid capital gains tax on the donated shares. From there, you can recommend grants to your favorite nonprofits over time.

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DAFs are particularly useful if you want to front-load several years of charitable giving while reducing your exposure to a concentrated stock position.

This approach also frees up future cash flow, which can then be used to further diversify your portfolio.

A real-world example

A retired pharmaceutical executive came to us holding a large amount of company stock. It had served them well, but they were entering retirement with too much of their future tied to one company.

We started by using direct indexing to build a more balanced portfolio around the concentrated position.

To support their charitable goals, we also helped them contribute five years' worth of donations to a donor-advised fund using appreciated shares, securing a significant tax deduction and further reducing exposure.

Finally, we set a capital gains "budget" to gradually sell off the remaining stock each year without triggering a major tax bill.

The result was a diversified, tax-efficient portfolio aligned with their long-term goals — achieved over time and without unnecessary stress.

Don't wait until it's too late

Holding a concentrated stock might feel like a point of pride, especially if it helped build your wealth. But in retirement or during periods of market stress, it can quickly become a liability.

The longer you wait to act, the fewer options you might have. It also becomes harder to unwind the position without triggering costly tax consequences.

Too often, investors wait until something goes wrong. But with a proactive approach, you can diversify gradually, preserve more of your gains and protect your long-term goals.

If any one stock makes up more than 20% of your portfolio, it's time to take a closer look. Then work with a qualified adviser who can help you evaluate your options, coordinate with your tax professional or estate attorney and build a customized plan.

You don't need to sell everything at once, but you do need a clear strategy for when to sell, how to sell and how much to sell.

Taking action now gives you more flexibility, more control and a better chance of protecting what you've worked so hard to build.

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