Concentrated Stock Risk: When Investment Success Creates Risk
By Gabriel Lewit
A guide to managing concentrated stock positions while considering diversification, taxes, equity compensation, retirement, and long-term financial goals.
A successful investment can create a problem you never expected:
- Maybe company stock received through restricted stock units (RSUs) or an employee stock purchase plan (ESPP) has grown significantly in value.
- Perhaps you’ve held a stock for decades, watching it become one of your largest assets.
- Or several investments in your portfolio have become increasingly tied to the same companies or sector.
The investment may have done exactly what you hoped it would. But as its value grows, so does an important question:
Has too much of my financial future become dependent on a single investment?
This is how concentration risk can develop. And the solution isn’t necessarily to sell everything at once. Instead, it’s about understanding how much exposure you have and whether it still makes sense given your other investments, tax considerations, retirement plans, cash flow needs, and comfort with risk.
In this Quick Guide, our team of financial advisors in the Chicago metro area explore how concentration risk develops, what it can mean for your financial future, and what to consider when evaluating a large investment position.
Concentration risk occurs when too much of your portfolio depends on a single stock, company, industry, sector, or group of closely related investments.
It doesn’t always come from intentionally making a large bet. Often, it develops gradually as an investment performs well.
Consider this example: You initially invest $100,000 in a stock as part of a $2 million portfolio. After years of strong performance, that position grew to $600,000. You haven’t purchased an additional $500,000 in shares, but the stock now represents 30% of your portfolio.
Employer stock can create a similar situation. RSUs vest, ESPP shares accumulate, and stock options are exercised. Over time, a growing portion of your wealth may become tied to the same company that provides your salary, bonuses, benefits, and future career opportunities.
For married couples, concentration risk can become even more significant when both spouses hold substantial positions in employer stock or investments tied to the same industry.
One spouse may have accumulated company shares over decades, while the other holds RSUs, stock options, or similar investments. When viewed together as part of the household’s total portfolio, these holdings could represent considerably more than 30% of their combined investments.
If both careers and a substantial portion of their wealth depend on the same company or industry, a downturn could affect their investments and household income at the same time.
Can You Be Concentrated Even If You Own Several Funds?
Yes. Owning a variety of investments doesn’t automatically mean your portfolio is diversified.
For instance, you might hold individual technology stocks alongside several mutual funds and ETFs that own many of those same companies. Each investment may appear diversified on its own, but when you look at the underlying holdings together, you may have more exposure to the same companies or sector than you realize.
That’s why concentration should be evaluated across your entire portfolio, not on a per-account basis. Here’s a quick-reference table to assist you in analyzing your concentration levels:
The issue isn’t simply whether a position has become large. It’s whether that exposure still fits your financial plan.
Yes, diversification should be considered when one investment exposes too much of your financial future to a single source of risk.
But diversification doesn’t automatically mean selling the entire position today. That’s where the decision becomes more complicated.
A stock you’ve owned for years may have substantial unrealized capital gains. Selling it can generate a significant tax bill.
Employer stock may also carry an emotional attachment because the company helped create your wealth.
There may also be practical reasons for taking a measured approach.
For example, if you have a $600,000 concentrated stock position and a $100,000 cost basis, you have a $500,000 unrealized gain. Selling the entire position in one year could produce a very different tax result than gradually reducing it over several years. However, spreading sales over time doesn’t guarantee lower taxes and leaves you exposed to the stock’s continued performance.
That doesn’t mean taxes should prevent diversification.
This is why it’s so important to evaluate both your investment risk and tax consequences together. While selling appreciated shares may trigger capital gains taxes, there may also be opportunities to offset some of those gains by harvesting losses from other investments.
If portions of your concentrated position have declined below their cost basis, selling those shares may also create tax-loss harvesting opportunities. These strategies should be evaluated within your broader investment and tax planning strategy.
Do You Have to Sell a Concentrated Position All at Once?
No. Depending on your circumstances, diversification could occur gradually. For example, you might set a target to reduce the position, sell shares over multiple tax years, redirect dividends, invest new money elsewhere, or use charitable giving as part of the strategy.
The right approach depends on the size of the position, cost basis, tax situation, liquidity needs, retirement timeline, and how much concentration risk you’re comfortable accepting.
Taxes matter when diversifying appreciated investments, but they should not be the only factor driving the decision. A tax-aware strategy can consider what you sell, when you sell it, and how the sale fits with other financial decisions.
Spread Sales Across Tax Years: Rather than selling a large position at once, shares may be sold gradually over several years. This can allow you to evaluate realized gains alongside your taxable income each year. However, the tax impact will depend on your circumstances.
Coordinate Sales With Changes in Income: A lower-income year may create a different tax environment than a year with a large bonus, business income, or substantial equity compensation. Once you are retired, realized gains can also affect modified adjusted gross income (MAGI), which may influence Medicare Income-Related Monthly Adjustment Amounts (IRMAA).
Review Cost Basis: Not every share may have the same cost basis. If shares were purchased or received at different times and prices, the choice of which tax lots to sell can affect the amount of gain recognized.
Consider Charitable Giving: If charitable giving is already part of your financial plan, donating appreciated securities directly may be worth evaluating rather than selling the shares and donating cash. Depending on the circumstances and applicable tax rules, this can help reduce a concentrated position while supporting organizations that matter to you.
The important point is that tax planning and investment planning should not happen independently.
With tax preparation services available through SGL Financial, investment decisions can be evaluated alongside potential tax consequences rather than addressing the tax impact only after a transaction has occurred.
Employer stock should be treated as part of your overall investment portfolio, not as a separate benefit that exists outside your financial plan.
RSUs, stock options, ESPPs, and other equity compensation can become a significant source of wealth, particularly if you are an executive or a long-tenured employee.
They can also create a unique form of concentration. Your paycheck already depends on your employer. Your bonus may depend on company performance. Your benefits and career opportunities may be connected to the business.
If a substantial portion of your investments is also tied to company stock, one company can influence several parts of your financial life at the same time.
The following table provides a general overview of how different types of employer compensation may be taxed. Actual tax treatment depends on the plan, the circumstances, and applicable tax rules.
Your equity compensation strategy should ultimately answer a larger question: What role should employer stock play in my family’s overall wealth?
Yes, although these approaches may not eliminate the underlying concentration.
If selling immediately would create significant tax consequences or conflict with other financial considerations, you may be able to build greater diversification elsewhere.
For example, you could:
- Direct new retirement and brokerage contributions toward investments that provide different exposures.
- Stop reinvesting dividends from the concentrated stock and invest the cash elsewhere.
- Rebalance other parts of your portfolio around the position.
- Use future savings to reduce the concentrated holding’s share of your overall portfolio over time.
- Evaluate hedging strategies when appropriate.
Hedging strategies can be complex and may involve costs, restrictions, tax considerations, and trade-offs. They should not be viewed as a simple substitute for diversification.
However, strategies that avoid selling have an important limitation:
- If the concentrated investment continues to appreciate faster than the rest of your portfolio, your concentration may continue to grow despite adding money elsewhere.
That’s why the strategy needs measurable targets. You may determine how much exposure you’re comfortable carrying and establish guidelines for reviewing or reducing the position.
Before the market forces you to. Waiting until a concentrated investment falls sharply turns a planning decision into a reaction.
A better approach is to establish conditions that trigger a review.
That could be when a single stock exceeds a certain percentage of your portfolio, when additional employer shares vest, or when a major life event changes what you need from your investments.
Retirement is an especially important time to reassess concentration. While you’re working, you may have salary and future savings available to help absorb investment losses. As retirement approaches, your portfolio may soon need to generate withdrawals for living expenses.
A large decline in a concentrated position at that point could have a very different impact.
Other useful review points include:
- Changing employers
- Exercising stock options
- Receiving a large RSU vest
- Selling a business
- Approaching retirement
- Beginning portfolio withdrawals
- Making significant charitable gifts
- Experiencing a substantial increase in the value of one investment
- Changes in your family or financial goals
Remember that you can’t predict what the market will do. You don’t need to know whether a stock will rise or fall next month to determine that too much of your financial future depends on it.
How Much Concentration Is Too Much?
There is no single percentage that is appropriate for every investor. But that doesn’t mean the answer should be vague. A concentrated position deserves closer review when a decline in that investment could materially change your retirement, cash flow, tax strategy, estate goals, or ability to fund other priorities.
For one investor, a 10% position may deserve attention. Another investor may intentionally accept a larger position because of taxes, other assets, income sources, or personal circumstances.
The percentage is only the starting point. Your retirement timeline, spending needs, family goals, and financial independence plans can all influence how much concentration risk makes sense for you.
This is where comprehensive financial planning becomes particularly important.
At SGL Financial, we take a holistic approach to concentrated stock planning. As fiduciaries, we begin with your needs, not a predetermined investment solution. Think of SGL Financial as your personal CFO: helping you understand the numbers, evaluate the trade-offs, and see how a concentrated investment fits into the rest of your financial life.
Every investment decision affects the bigger picture. Connect with SGL Financial’s Chicagoland financial professionals to help mitigate your concentration risks and discuss your options.
Frequently Asked Questions About Concentrated Stock Risk
What percentage of one stock is considered too concentrated?
There is no universal percentage, but a position deserves closer review when a significant decline could materially affect your retirement, income needs, or other financial goals. The appropriate level of exposure depends on your overall portfolio, financial circumstances, and risk tolerance.
Should I sell company stock if it represents a large part of my portfolio?
If a company’s stock creates more concentration risk than your financial plan supports, reducing the position may be worth considering. That doesn’t necessarily mean selling everything at once. Tax implications, cash flow needs, and your broader investment strategy should also factor into the decision.
How can I diversify a concentrated stock position without creating a large tax bill?
Potential strategies include selling shares over multiple tax years, selecting specific tax lots, coordinating sales with income changes, donating appreciated shares when appropriate, and directing new investments elsewhere. The tax impact will depend on your individual circumstances, and no strategy can guarantee a lower tax bill.
Can I be too concentrated even if I own mutual funds and Exchange-Traded Funds (ETFs)?
Yes. Multiple funds can hold many of the same companies, creating overlapping exposure that may not be obvious until you examine their underlying holdings.
Does diversification mean giving up the potential for future gains?
No. Diversification doesn’t mean abandoning an investment’s growth potential. It means balancing the potential rewards of an individual holding with the risks of relying too heavily on it. The goal is to build a portfolio that supports your broader financial goals without depending too heavily on a single investment.
How do RSUs and stock options contribute to concentration risk?
RSUs, stock options, and ESPPs can increase your exposure to your employer’s stock over time. Because your salary, benefits, and investments may all depend on the same company, reviewing your equity compensation alongside your broader financial plan can help you assess your overall exposure.
