If a single stock makes up a large share of your net worth, you are running a portfolio nobody would design on purpose. Concentrated positions arise through success — a long tenure at a company that did well, equity compensation that vested and was never sold, an inheritance held out of loyalty. That history makes them difficult to unwind for reasons that are only partly financial.
The risk you are actually carrying
Individual stocks are far riskier than the index they belong to. Research on the lifetime returns of US stocks has repeatedly found that the majority underperform Treasury bills over their full lifespan, and that aggregate market returns are driven by a small minority of enormous winners. Concentration is a bet that your holding is in that minority.
The risk is compounded when the position is your employer. Your salary, your equity compensation, your health insurance, and a large share of your investable assets then depend on the same company. A single bad outcome hits all four simultaneously — which is precisely the correlation you buy diversification to avoid.
Ask the question in reverse: if this position were liquidated tomorrow and handed to you as cash, would you buy this much of this stock today? Very few people say yes.
Why people hold anyway
Three reasons dominate, and each deserves a direct answer.
“The tax bill is too large.” Tax is a real cost, but it is a one-time cost against an ongoing risk. A 20% federal rate on a gain is unpleasant; a 60% decline in an undiversified holding is worse, and the tax you avoided is then permanently irrelevant. Tax should shape the pace of diversification, not veto it.
“I know this company.” Familiarity is not an informational edge, and if you genuinely have one, acting on it is likely restricted or illegal. Employees are frequently the last to see structural decline, because the same optimism that makes someone effective at a company makes them a poor analyst of it.
“It has been good to me.” This is the honest one, and it is not a financial argument. Past performance has created an emotional obligation the stock cannot reciprocate.
Ways to reduce exposure
- Scheduled sales. A written plan — a fixed percentage each quarter over two or three years — removes the need to time the exit and defuses regret. For insiders, a 10b5-1 plan provides a compliant framework.
- Stop reinvesting. Redirect dividends, new contributions, and future vesting to diversified holdings. Sell shares at vest, when the tax cost is near zero because the income has already been recognized.
- Charitable transfer. Gifting appreciated shares directly, or funding a donor-advised fund with them, avoids the capital gain entirely while producing a deduction at fair market value.
- Loss pairing. Offset realized gains with harvested losses elsewhere in the portfolio to reduce the net tax on each tranche.
- Exchange funds. For very large positions, contributing shares to a pooled fund in exchange for a diversified interest defers the gain — at the cost of a multi-year lockup and meaningful fees. Read the terms closely.
- Protective options. Collars and protective puts can cap downside during a planned unwind. They are a bridge, not a destination, and they carry their own costs and tax complications.
A reasonable target
Most planning frameworks treat any single position above 10% of investable assets as concentrated, and anything above 20% as requiring an active plan. Those are not magic numbers, but they are a useful prompt.
The goal is not to eliminate the position overnight. It is to have a written, dated plan that reduces it on a schedule you chose deliberately — rather than on a schedule the market chooses for you.
