Stock Concentration: Why Reducing Risk Isn’t Just About Selling

It often starts the same way.

A position grows quietly over time — through equity compensation, market participation, or simply holding onto a company you believe in. What begins as a success story can turn into a single position that represents a meaningful share of your wealth.

At some point, the question changes from “How much has this grown?” to “What should we do about it?”

That’s where many investors get stuck.

Selling can trigger a large tax bill. Holding introduces risk that is easy to underestimate. And doing nothing is still a decision — not always an intentional one.

At Wealth Enhancement, we take a different approach. Instead of forcing a binary choice, we think about concentration as a planning problem with multiple paths forward. Each path serves a different purpose, and the right solution is often a combination.

We think about it in four parts: unwind, manage, donate, and gift.

But First, Why Concentration Becomes a Problem Over Time

A concentrated stock position is typically defined as 10% or more of an investor’s portfolio in a single stock.

That threshold matters because risk is no longer diversified. The outcome of a single company begins to shape your entire financial picture – which is exactly why stock concentration deserves its own conversation.

There are three forces at play:

• Market risk: Even strong companies can decline. In fact, most stocks experience significant drawdowns at some point in their lifecycle.
• Tax friction: Selling appreciated shares creates capital gains, which can discourage action.
• Behavioral bias: Familiarity, loyalty, or success can make it harder to reduce exposure.

This combination creates what we often call a “frozen position.” You recognize the risk, but every available move feels costly.

That’s why the solution needs to go beyond a single transaction.

Closer Look: How Plan-Led Investing Works for You

A Real Example: Turning a Concentrated Position Into a Plan

One investor came to us with about $5.3 million in total investable assets, including $2 million in a single stock — with a very low cost basis. Selling outright would have created a significant tax burden, so doing nothing felt easier.  

Instead of forcing a single decision, we built a coordinated plan:

• Introduced an options overlay to generate income and create a buffer against downside  
• Modeled long-term cash flow to confirm spending flexibility  
• Evaluated tax strategies, including charitable giving and future withdrawals  
• Created a path to gradually diversify the position over time  

The result wasn’t just a portfolio adjustment. It was clarity around spending, taxes, and how to reduce risk without acting all at once.  

Closer Look: Explore the full case study

The Framework: Four Ways to Address Concentration

We think about concentration strategies in four categories. Each addresses a different objective:

• Unwind: Reduce exposure over time  
• Manage: Hedge, reposition, or monetize without immediate sale  
• Donate: Transfer appreciated assets tax-efficiently  
• Gift: Shift wealth across generations with intention  

Most investors use more than one.

1. Unwind: Reducing Exposure with Intention

The most direct way to address concentration is to sell shares and reinvest into a diversified portfolio.

But how you unwind matters as much as whether you do.

Immediate vs. Gradual Unwinding

An immediate sale simplifies the situation. It removes risk quickly — but it can also create a significant tax obligation.

A more thoughtful approach is a multi-year unwind, where shares are sold systematically over time.

This allows you to:

• Spread capital gains across multiple tax years  
• Align sales with income levels or tax brackets  
• Use market volatility to your advantage  
• Reinvest gradually into a diversified allocation  

This is not about timing the market. It’s about controlling the pace of change.

In practice, we often define:

• A target allocation for the position  
• A time horizon for reducing exposure  
• An annual tax budget to guide sales  

The result is a disciplined process instead of a one-time decision.

2. Manage: Creating Flexibility Without Fully Selling

In some cases, you may not want — or be able — to sell immediately.

That’s where investment strategies can help manage risk while maintaining the position.

These approaches don’t eliminate concentration, but they can reshape how it behaves within your portfolio.

Ways We Manage Concentrated Stock

Options Strategies 
Techniques like covered calls or collars can:

• Generate income  
• Provide downside buffers  
• Limit some upside in exchange for stability  

Variable Prepaid Forward Contracts 
A variable prepaid forward (VPF) contract allows an investor to receive cash today in exchange for agreeing to deliver stock shares at a future date. This approach can:  

• Generate liquidity without immediately selling shares
• Potentially defer taxes owed on capital gains
• Enable some continued participation in future stock appreciation

Exchange Funds 
These pool concentrated positions with others to create diversification while deferring taxes. Holders of concentrated stock “exchange” their stock for shares in a fund for a period of time, followed by a distribution of a diversified basket of securities. Exchange funds often require high minimums and long holding periods.  

Long/Short Strategies 
These combine long positions with short positions to:

• Enable greater customization
• Potentially offset gains with losses  
• Create a more tax-aware transition from concentration  

Long/short approaches can function as a “three-in-one” strategy: diversification, return potential, and tax management working together.  

The key idea is flexibility. You don’t have to choose between holding and selling — you can adjust how the position behaves within your overall portfolio with the goal of continuing to capitalize on the stock you’ve invested in over time.

3. Donate: Aligning Tax Strategy with Charitable Intent

For investors who are charitably inclined, concentrated stock can become a powerful planning tool.

Donating appreciated shares — rather than cash — can provide two advantages:

• Avoid capital gains taxes on the donated shares  
• Receive a deduction based on fair market value  

Donor-Advised Funds
A donor-advised fund (DAF) allows you to:

• Contribute appreciated stock  
• Receive an immediate tax deduction  
• Distribute funds to charities over time  

This approach is often used to offset a high-income year, reduce concentrated exposure, and create a structured giving strategy.

Charitable Remainder Trusts
For more complex situations, a charitable remainder trust (CRT) can:

• Provide an income stream for a set period  
• Defer capital gains taxes  
• Create a future charitable gift  

These strategies work best when giving is already part of your plan. They are not just tax tools — they are planning tools that align financial and personal goals.

4. Gift: Transferring Wealth with Purpose

Gifting concentrated stock introduces a different kind of tradeoff.

When you gift shares during your lifetime, the recipient assumes your original cost basis, and future gains may be taxable when they sell.

When assets are transferred at death, beneficiaries typically receive a step-up in basis, and unrealized gains may not be taxed. However, this means you hold onto the single-stock risk in the meantime.

This creates a planning decision:

• Gift now: Reduce your estate and shift future growth  
• Hold and transfer later: Preserve tax efficiency through step-up  

There is no universal answer. The right choice depends on many factors: your estate size and potential tax exposure, your family’s goals and timing, and the role of the asset within your broader plan.  

What matters is making the decision intentionally, rather than defaulting to inertia.  

Bringing It Together: A Coordinated Approach

The most effective way to address stock concentration is often not to choose one path — it’s usually to combine them.

A typical strategy might look like:

• Gradually unwinding a portion of the position each year  
• Using management strategies to stabilize what remains  
• Allocating some shares to charitable giving  
• Evaluating gifting opportunities within a broader estate plan  

Each decision affects the others.

Selling impacts taxes. Taxes influence gifting. Gifting changes estate outcomes. Investment strategies shape how quickly you can diversify.

That’s why concentration is not just an investment issue — it’s a planning issue. The first step is simply recognizing that it is not a reward to be protected at all costs, but a risk to be managed thoughtfully — with the full range of tools that your advisor has at their disposal.

A Different Way to Think About Concentrated Stock

The goal isn’t to eliminate concentration overnight.

It’s to move from a passive position to an intentional one.

That means understanding:

• What risks you are taking  
• What tradeoffs you are willing to accept  
• What role the position should play going forward  

When those answers are clear, the path forward becomes clearer too.

And instead of asking, “Should I sell?” You start asking, “How should this fit into my plan?”

There can be no assurance that any particular investment objective will be realized or any investment strategy seeking to achieve such objective will be successful. Investing involves risk, including the possible loss of principal.

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