Concentrated stock: risks and how to diversify

You have a concentrated stock position if any single stock is worth more than 10% to 20% of your portfolio value. But let’s be real here: It’s not uncommon for people to have an investment portfolio made up of just 1 or 2 stocks.

If you have a concentrated stock position, it’s usually because something went well. Years of RSU grants that outpaced your selling. A startup stock option that paid off. A single bet you made a decade ago that’s now worth ten times what you paid.

It feels like the result of good decisions. But a portfolio that’s 40% one company is exposed to that company’s fortunes in a way a diversified portfolio simply isn’t, and that exposure doesn’t go away just because the stock has been kind to you so far.

What counts as a concentrated stock position?

There’s no single legal threshold, but the common working line among financial planners is 10% to 20% of investable net worth in one stock. Cross that, and most advisors will start flagging it. Cross 25%, and it becomes the dominant driver of your portfolio’s outcome, for better or worse.

A concentrated stock position accumulates because something went well. Not because you did something wrong. The position is concentrated by circumstance, not by design or mistake, which is exactly why it’s easy to underweight how much risk it represents.

Why concentration is riskier than it feels

The risk isn’t abstract. Individual stocks (even good ones) can lose most of their value in a matter of months. For example, Meta dropped nearly 80% in 2022 from its 2021 peak before recovering because of revenue decline, a huge loss of daily active users, and Apple’s privacy policy change affecting Meta ads.

This is a good reminder of the risks to your concentrated stock position: a bad product cycle, a regulatory problem, a competitor’s breakthrough, a management mistake.

There’s also a version of this risk that’s specific to how most concentrated positions get built: through employment and RSUs. If your concentrated position is in the company you work for, a downturn in the stock often arrives at the same time as layoffs, a hiring freeze, or a pay cut — the exact moment you’d most want your portfolio to be stable is the moment it’s most correlated with your paycheck.

None of this means the stock is a bad investment. It means a portfolio built around one company’s performance is taking on risk a diversified portfolio wouldn’t.

How to fix a concentrated stock position and what it costs

The conventional advice is straightforward and sound: sell down the position and reinvest the proceeds into a diversified portfolio. It’s also the advice you might resist, for a reason that has nothing to do with conviction in the stock: the tax bill.

Say you’re a mid-career engineer at a large tech company who’s held vested shares worth $1.2 million, with a cost basis of $150,000 from years of RSU vesting at lower prices. Selling the position to diversify realizes roughly $1.05 million in long-term capital gains. At a combined federal and state long-term rate that can run close to 35-37% in high-tax states, that’s a tax bill in the neighborhood of $350,000+ that doesn’t make it into your diversified portfolio at all.

Example: a mid-career engineer’s concentrated position

Vested shares, current value

$1,200,000

Cost basis (from RSU vesting)

$150,000

Long-term capital gain if sold

~$1,050,000

Combined federal + state rate (high-tax state)

35–37%

Estimated tax bill on sale

$350,000–$400,000

That’s six figures that never makes it into the diversified portfolio at all — money an exchange fund lets you keep invested instead of handing to the IRS up front.

That’s the tradeoff: sell and pay six figures in tax now, or keep holding the concentration risk to defer that bill. Framed that way, it’s not surprising so many people just don’t sell.

Selling isn’t the only way to diversify your portfolio — see if you qualify to join the Glidepath fund.

You can fix your concentrated stock position

Selling outright isn’t the only path. Here are more approaches for you to consider.

Hedging strategies can reduce downside risk without selling, but they add ongoing cost and complexity, and they don’t actually diversify you. You still own the same stock, just with some downside protection layered on top. Donating shares is genuinely tax-efficient, but it only makes sense for the portion of your position you’re comfortable giving away permanently.

For investors who want real diversification without an immediate tax bill, that leaves the exchange fund as the option built specifically for this problem.

How an exchange fund solves your concentration risk differently

An exchange fund works by pooling contributed stock from many investors into a single fund. If most of your net worth is tied up in one stock, the way to diversify without a huge tax bill is to exchange those shares for a stake in the fund instead of selling them outright. You receive a proportional interest in the fund’s diversified holdings, not cash, so there’s no sale and no immediate capital gains tax under Section 721 of the tax code.

The tradeoff is time: to keep the tax deferral, you need to stay in the fund for seven years. At that point, you can redeem your stake for a diversified basket of holdings, and your original cost basis carries over. The tax bill you deferred is still there, but it’s deferred, not gone, and the capital that would have gone to the IRS has spent seven years compounding in a diversified portfolio instead.

Going back to the engineer example above: instead of selling $1.2 million in stock and losing roughly $375,000 to tax before reinvesting the remainder, that same $1.2 million goes into the exchange fund intact. Every dollar that would have gone to taxes stays invested and diversified for seven years before the deferred liability comes due.

Illustration

The cost of paying the tax bill up front

A hypothetical $1.2 million concentrated stock position, held for seven years two ways: sold today to diversify (after an estimated $375,000 capital gains tax), or contributed to an exchange fund and left to compound with no tax due at contribution.

$642,684more compounding after 7 years by deferring the tax, in this illustration

• Exchange fund, tax deferred
• Sell now and reinvest

View as table

Year	Exchange fund, tax deferred	Sell now and reinvest
Year 0	$1,200,000	$825,000
Year 1	$1,296,000	$891,000
Year 2	$1,399,680	$962,280
Year 3	$1,511,654	$1,039,262
Year 4	$1,632,587	$1,122,403
Year 5	$1,763,194	$1,212,196
Year 6	$1,904,249	$1,309,171
Year 7	$2,056,589	$1,413,905

Glidepath is an exchange fund with no management fee. The fund’s qualifying illiquid asset generate income which covers the costs that would have come out of your capital. Eligibility follows the standard accredited investor rules: individual income over $200,000, joint income over $300,000, or net worth over $1 million excluding your primary residence, with a $100,000 minimum contribution.

If you’re carrying a concentrated position and want to see what diversifying through an exchange fund would actually look like for your numbers, see if you qualify to join the Glidepath fund.

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