A concentrated stock position is single equity holding that comprises more than 10-15% of an investor's overall portfolio. This presents both significant opportunity and substantial risk.

These positions frequently arise among corporate executives with equity-based compensation, company founders who've retained significant ownership, early employees of successful startups, or inheritors of family business wealth. While it’s rewarding, portfolio performance becomes disproportionately tied to the fortunes of a single company. The type of exposure  results in heightened volatility, potential liquidity constraints, and complex taxes.

When it comes to managing concentrated stock options, these practical strategies balance the preservation of wealth-building opportunities while also reducing the inherent risks of concentrated positions.

When substantial personal wealth is tied to a single company's performance, an investor's financial future becomes vulnerable to company-specific risks that diversification would otherwise mitigate. For example, Lehman Brothers employees with concentrated positions lost life savings when the firm collapsed in 2008.

Beyond failure, concentrated positions face ongoing challenges such as regulatory changes affecting a specific industry, competitive disruptions, management missteps, or broader market shifts can disproportionately impact a single company's valuation. Executives and founders of their companies may also maintain concentration due to emotional attachment, misplaced loyalty, or overconfidence in their company's prospects..

Systematic selling is a straightforward approach to reducing concentration, though implementation requires careful planning around taxes, timing, and potential signaling effects.

Strategies include coordinating sales across multiple tax years, implementing tax-loss harvesting to offset gains with losses from other investments, and timing transactions around charitable giving. Executives with significant options or restricted stock can integrate vesting schedules in order to diversify their portfolio.

Advisors often recommend establishing clear thresholds. This can include maintaining no more than 10% of investable assets in employer stock and implementing systematic selling programs that trigger when concentration exceeds target levels.

For investors unable or unwilling to divest immediately, hedging strategies offer protection while maintaining ownership. Options-based approaches include portfolio insurance that establishes a floor price while preserving upside potential.

Zero-cost collars is another strategy that combines protective puts with covered calls, creating a range of possible outcomes by sacrificing some upside potential to fund downside protection.

Exchange funds provide an alternative approach, allowing investors to contribute concentrated positions into a pooled investment vehicle containing diverse stock contributions from other participants. For instance, after the required holding period (typically seven years), the investor receives ownership in the diversified portfolio without triggering immediate capital gains. For example, an executive with $10 million in real estate company shares might exchange these for equivalent ownership in a fund holding dozens of stocks across multiple sectors.

Donating appreciated stock to donor-advised funds (DAFs) or direct charities allows investors to avoid capital gains taxes while receiving immediate income tax deductions based on the full market value of contributed shares.

For substantial positions, charitable remainder trusts provide current income streams to the donor while converting concentrated positions into diversified portfolios, deferring capital gains, and ultimately benefiting selected charities.

Significant ownership may be necessary for maintaining board influence, signaling confidence to markets, or meeting retention requirements. Many founders believe their company knowledge provides informational advantages that justify higher allocation levels.

A balanced approach, however, often involves segmenting holdings into core positions required for corporate governance or incentive alignment versus excess concentration that primarily represents financial risk.

Liquidity events like public offerings, secondary offerings, or acquisition transactions create natural opportunities to implement diversification without negative signaling.

Managing concentrated stock positions requires balancing competing priorities, which are wealth preservation against growth opportunity, tax efficiency against risk reduction, and emotional attachment against financial prudence. The most successful approaches combine multiple strategies such as systematic selling, strategic hedging, and philanthropic planning.

With proper planning, concentrated position holders can  transform single-stock risk into diversified wealth that supports long-term financial security while preserving appropriate participation in future company success.

Written by: Taylor Bushey

ProCore Advisors is a Registered Investment Advisor in the states of California, Oregon, and Texas. Reference to registration does not imply any particular level of qualification or skill. Investment advisory services available only in jurisdictions where ProCore Advisors is appropriately registered. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.