Concentrated Stock: How to Think About Diversifying Out of a Single Position

If you’ve spent years at a company that granted equity, or you received company stock as part of an acquisition, or your business sold and you received stock in the acquiring company, you may now own a lot of one thing.

That one thing has probably done well. And that’s precisely what makes diversifying out of it so difficult.

The Risk Most People Underestimate

A concentrated position in a single stock feels different from other investment risks because there’s a specific story attached to it. You know the company. You’ve watched it grow. You may have genuine loyalty or optimism about its future.

That emotional connection is exactly why concentrated stock risk tends to be underestimated. Selling feels like abandoning something that’s worked.

The financial reality is more sobering. Any single company, regardless of size or track record, can experience severe and prolonged declines. Enron was a top-10 S&P 500 company by market cap before its collapse. Intel, once among the most dominant technology companies in the world, lost more than 60 percent of its value over a multi-year stretch. These aren’t edge cases; they’re reminders that company-specific risk is real, even for companies that look invincible.

When a large portion of your net worth is tied to one company, your financial future is significantly shaped by decisions made by people other than you.

What Counts as Too Much?

A common guideline: any position representing more than 10 percent of your investable assets deserves attention. Above 20 percent, it’s worth a real conversation about strategy. At 30 percent or more, the concentration is significant enough to be a genuine financial planning issue.

These aren’t hard rules. They’re useful anchors for assessing where you stand and how exposed you really are.

The Real Obstacle: Taxes

The main reason most people don’t diversify out of appreciated positions is the anticipated tax bill. If you acquired shares at $10 per share and they’re now worth $80, selling creates a $70 per-share capital gain subject to federal capital gains tax and potentially the 3.8 percent Net Investment Income Tax (NIIT) for higher earners.

This is a real cost. But “I don’t want to pay taxes” is not a sound reason to hold a concentrated position indefinitely. Paying taxes on a gain is what happens when an investment works. The more useful question is whether the potential tax cost of diversifying is greater than the financial risk of staying concentrated. In many cases, it isn’t.

Strategies Worth Understanding

Financial planners use several approaches to help clients address concentrated stock positions. None eliminate taxes entirely, but they can meaningfully reduce the impact.

Gradual systematic sale means selling a defined dollar amount or number of shares on a regular schedule, quarterly or annually. This spreads the tax impact over time, removes the pressure to time the market, and creates a predictable path toward diversification. It’s simple and effective for many situations.

Tax-loss harvesting in other parts of your portfolio can offset gains from selling the concentrated position. If you hold other investments with unrealized losses, selling them in the same tax year reduces your net capital gains tax on the concentrated sale.

Charitable giving with appreciated shares is one of the most tax-efficient approaches for people with charitable intent. Donating shares directly to a charity or a donor-advised fund lets you avoid capital gains on the appreciation entirely while taking a charitable deduction for the full fair market value of the shares.

More complex strategies, including exchange funds, covered call overlays, and monetization loans, can be valuable in specific situations. These carry additional complexity and costs and are worth exploring with an advisor who understands your full financial picture.

A Word on Employee Lock-Up Periods and Trading Windows

Many employees with company stock are subject to trading windows or pre-clearance requirements that limit when they can sell. These are common at public companies and are designed to prevent insider trading. If you’re in a blackout period, you may not be able to execute a diversification strategy until the window opens.

This is one more reason to build a plan in advance. When the window opens, you want to be ready to act, not scrambling to decide what to do with a few days to spare. The same applies to RSU vesting events: if you know shares are vesting in a specific quarter, that’s a natural trigger to review and potentially act on your diversification plan, not a reason to wait and see.

The Timing Problem

The hardest part of addressing a concentrated position is often just starting. The tax bill feels like a deterrent. The emotional attachment to the stock provides a reason to wait. “I’ll deal with it later” becomes the default.

Later tends to arrive as a sharp decline. Building a plan while the position is healthy, and you have real options, is almost always better than reacting under pressure after a significant drop.

If you hold a meaningful amount of a single company’s stock and haven’t thought through a diversification strategy, a conversation with a financial advisor is a reasonable next step. The goal isn’t to override your investment convictions. It’s to make sure the concentration level you’re holding is a deliberate choice, not just something that accumulated by default.

Schedule a consultation at Austin Wealth Management.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.