Single stock risk is what you’re carrying when one company’s stock makes up an outsized share of your net worth. It’s rarely a choice anyone makes on purpose.
A decade of RSU grants, a startup that went public, or a family stock passed down through generations can all lead to a concentrated portfolio. However the position built up, the risk it carries is the same. Your financial future is too dependent on one company’s fortunes instead of the broader market’s.
What counts as single stock risk
There’s no definite line or number, but the working rule most financial planners use is that a position becomes concentrated somewhere between 10% and 20% of your total investable assets.
Single stock risk is the risk you take on when a large share of your net worth depends on one company’s stock instead of a diversified portfolio, and it matters because that one company’s fortunes, not the market’s, end up driving your outcome.
The risk isn’t always confined to a single ticker, either. Holding your own company’s stock alongside a handful of other names in the same industry can leave you just as exposed as owning one stock outright, because those holdings tend to rise and fall together.
Why single stock risk matters more than it feels like it should
In March 2023, Silicon Valley Bank went from a functioning regional bank to a stock worth close to zero in about 48 hours once a bank run made its balance sheet problems public. Investors who held a concentrated position in SVB stock lost it entirely, with no gradual decline to react to and no way to see it coming from outside the company.
The collapse also showed how concentration risk can hide inside a portfolio that looks diversified on the surface.
Roughly half of all U.S. venture-backed tech and life sciences companies banked with SVB. An investor holding equity across a dozen different Silicon Valley startups might have felt diversified, since no single company dominated the portfolio. But if most of those startups banked at SVB, their fortunes were tied to the same single point of failure.
When SVB’s problems became public, the companies that depended on it for cash all faced the same crisis at once.
Concentration risk isn’t only about how many tickers you own. It’s about how many of them have dependencies in common. A diversified portfolio can absorb one holding going to zero. A portfolio that only looks diversified, but is actually exposed to one shared point of failure, can’t.
How you end up with single stock risk
Concentrated positions are usually the byproduct of something going well. Years of RSU grants vesting faster than you sold them, an early equity stake that turned into real money after an IPO, a stock inherited from a family member, or a single early bet that simply outgrew the rest of your portfolio.
None of these paths are mistakes. They’re usually evidence that something went right, which is exactly why the resulting risk is so easy to miss.
Ways to reduce your single stock risk
Here are the common ways of diversifying and spreading your concentration risk:
Selling outright removes it fastest, but unless you can reduce or avoid the resulting capital gains tax, you’re paying the full bill in one year.
Spreading sales across several years softens that tax hit, but it stretches out how long you stay exposed while you do it.
Options-based hedging, like a collar, can limit your downside without selling, though it adds ongoing cost and complexity, and you still own the same stock underneath it all.
An exchange fund lets you exchange your concentrated shares for a stake in a diversified pool, with no sale and no immediate tax bill.
None of the fixes here are mutually exclusive, and which one makes sense depends on your tax situation, your timeline, and how quickly you want the risk gone.
Why an exchange fund often fits a large position best
For a position large enough that selling it outright would trigger a serious tax bill, an exchange fund tends to stand out because it’s the only option on that list that gets you fully diversified without a sale.
Exchange funds, like Glidepath, work by pooling contributed shares from many investors into a single diversified pool. You receive a proportional stake in that pool instead of cash, so there’s no sale and no immediate capital gains tax due, under the same Section 721 of the tax code.
If you have significant unrealized gains and are worried about concentration risk, check your eligibility for the Glidepath fund before it grows any further.
An exchange fund protects your wealth and keeps more of it compounding
Say Elena is an early employee at a company that went public three years ago, and her exercised shares are now worth around $400,000, which is half of her total net worth.
If that one company’s stock dropped 40% tomorrow, she would lose $160,000, a fifth of her net worth, in a single event (with no guarantee of a bounce-back).
If that same $400,000 were spread across a diversified portfolio instead, a 40% drop in any one holding within it would cost her a small fraction of that. The loss would be contained to whatever sliver of the portfolio that single stock represented.
Selling outright would fix the concentration too, but it means paying capital gains tax on the gain in the same year you sell. This is what exchange funds were built to fix. You get diversification without the tax bill.
FAQ
What is single stock risk?
Single stock risk is the risk you take on when one company’s stock makes up a large enough share of your net worth that its performance, not the market’s, ends up driving your financial outcome. Most planners start flagging it once a position crosses 10% to 20% of your investable assets.
How much of my portfolio should really be in one stock?
There’s no universal number, but once a single holding starts driving the outcome of your entire portfolio rather than just contributing to it, you’re carrying more risk than a diversified investor. If losing that one position would set back your financial goals in a real way, it’s concentrated enough to take seriously.
Can I get rid of single stock risk without triggering a big tax bill?
Yes, though it depends on the size of your position and your timeline. An exchange fund is generally the option that gets you fully diversified without an immediate sale, at the cost of committing your position for several years.
Reducing single stock risk doesn’t mean giving up on the position that got you here. It means deciding, deliberately, how much of your future you want tied to one company instead of the market as a whole.
