- Many clients fail to realize the risks involved in holding concentrated stock.
- Even in years when the overall equity market rises, a significant number of stocks fall in price.
- Donating concentrated stock to charity can help clients avoid capital gains taxes while still benefiting from a tax deduction.
For clients who have either received a large inheritance or worked at the same company for a number of years, there’s a chance that much of their wealth is tied up in a single stock. This, of course, is rewarding when shares of the company are rising, but may expose them to significant risk should the price drop unexpectedly.
There is no single definition of “concentrated stock,” but a broad rule of thumb is that any position making up more than 10% of a portfolio should be reviewed for appropriateness. Not every concentrated position needs to be sold off. Indeed, it may be possible for a client to continue to hold a sizable amount of one stock if their portfolio also has a solid foundation of well-diversified investments to help meet their goals. But in most cases it’s our job to help clients see the value of a well-rounded approach.
It can be difficult to convince clients who have benefited significantly from concentrated stock positions to lighten their positions and broaden their holdings. Aside from the pure monetary gains, clients may have emotional ties to a company at which they or a family member worked. Nevertheless, I have found over the years that stressing a few key points can help clients understand the risks of concentrated positions and make clear why a more diversified approach is generally best.