Over the past decade, a small number of various technology stocks have outperformed the broader market. While this created value for many investors, it also left some with a concentrated position in just one or two individual stocks.
Holding too much of your wealth in a single company’s stock can expose you to unnecessary risk. A question we frequently hear from our clients is, “How can I diversify without missing out on future upside?”
Our answer? There are several strategies you can use to gradually reduce concentrated positions while maintaining discipline and helping improve tax-efficiency.
- Installment Sales
Selling all your shares at once can trigger a larger tax bill. Instead, consider an installment plan where you sell shares over time. This approach may help ease the impact of price fluctuations and maintain a structured path to diversification. - Options Strategies
Options can be a helpful tool to manage risk or generate income from a concentrated stock position. Depending on your unique goals, options may allow you to hedge against downside risk, lock in a potential selling price, or create income streams while you diversify. - Exchange Funds
An exchange fund allows you to contribute shares of your stock in return for exposure to a diversified basket of securities. This can help spread out your risk without immediately selling your concentrated position and triggering capital gains taxes. - Direct Indexing
Direct indexing offers an opportunity to harvest tax losses across a broad portfolio of stocks. Those realized losses can then be used to offset the gains from selling shares in your concentrated position, making the diversification process more tax-efficient.
Building Out Your Plan
Your financial goals, tax situation, and comfort with risk will drive the right approach — or combination of approaches — for your unique needs. Developing a disciplined plan can help you reduce the risks of concentration while helping set you up for long-term financial stability.
If you’re an Apple employee navigating stock compensation, our guide can help you understand strategies tailored to your situation.
Ready to take the next step? Explore our financial evaluation tool to begin to understand where you stand and steps you may want to take.
Louis Odette (00:00:00 – 01:20:21)
Given the outperformance of a small number of technology stocks over the past decade plus, we often encounter individuals that have built up sizable concentrated position in a single stock or two, and they ask us how we can help them to diversify that exposure. So there are a number of things that we often recommend. One is just installment sales. So have a plan and stick to it. And that helps remain disciplined even in the face of stock price fluctuations. Another tool in our tool kit is options, which can help to generate income from concentrated positions or manage the risk around it, or both. There are also what’s known as exchange funds, where you can contribute shares of your stock and get exposure to a diversified basket of stocks in exchange. And finally, we have a tool called direct indexing, which allows you to harvest losses across a number of stocks and use those losses to offset gains in your concentrated position. So one or many of these strategies can help to form an overall plan for diversifying out of concentrated stock positions.
Written by: Louis Odette
Disclaimer: Case Studies are provided for illustrative purposes only to provide an example of the firm’s client base, process, and methodology. The experiences portrayed herein are not representative of all firm clients. Other individual outcomes may vary based on their individual circumstances, and there can be no assurance that the firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the firm’s financial and investment advisory services. Client tax situations are unique and specific, and you are encouraged to consult a tax professional to analyze your specific situation. This material has been prepared for informational purposes only, and is not intended to provide tax, legal or accounting advice; nothing contained in these materials should be taken as such. The opinions expressed in this article are not intended to provide specific advice or recommendations for any individual or on any specific tax strategy or security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Opes Wealth Management cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Advisory services are only offered to clients or prospective clients where Opes Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place.
