Managing Concentrated Stock Positions: Smart Tax-Deferral Strategies and Practical Portfolio Risk Reduction
For many successful investors, a large portion of their wealth comes from a single stock that performed exceptionally well. It might be employer equity compensation, founder shares after a business exit, inherited stock, or early-stage investments that multiplied in value.
On paper, that concentration can look like a triumph. In reality, it often creates a quiet
but significant financial risk.
A concentrated stock position can dramatically increase volatility, limit flexibility, and
create difficult tax decisions. Selling may trigger a substantial capital gains bill. Holding indefinitely may expose you to downside risk that may not align with your broader financial objectives. The real challenge is not whether to act, but how to act intelligently. This article breaks down practical tax-aware strategies for managing concentrated stock positions while reducing portfolio risk in a disciplined, strategic way.
Charles Sachs’ perspective on managing concentrated stock positions, highlighted in this Financial Advisor Magazine analysis on tax-deferral trade-offs, underscores the importance of balancing diversification with strategic tax planning.
In the article, Unload Overweighted Stocks and Defer the Tax — But There’s a Catch, the nuances of deferring capital gains while reducing portfolio risk are examined in detail including where investors may unintentionally create new layers of complexity.
At Imperio Wealth Advisors, our in-house CFA, Charles Sachs, evaluates these strategies within the broader context of each client’s long-term wealth architecture, ensuring that tax efficiency, liquidity planning, and risk mitigation work in concert rather than in conflict.
Why Concentrated Stock Positions Merit Careful Evaluation
A portfolio becomes “concentrated” when a single stock makes up more than 10–15% of total investable assets. Many high-net-worth individuals exceed that threshold by a wide margin sometimes holding 30%, 50%, or more in one company.
That concentration introduces several risks:
- Company-specific risk (earnings shocks, litigation, leadership changes)
- Sector concentration risk
- Liquidity risk
- Employment risk (especially for executives)
- Behavioral bias
The issue isn’t whether the company is strong. Even exceptional companies experience drawdowns. Markets reprice quickly, and when one stock dominates your portfolio, your financial future becomes disproportionately tied to one outcome.
Diversification is not about pessimism. It is about resilience and risk management over
time.
The Tax Lock-In Dilemma
Many investors hesitate to sell because of the tax bill.
When highly appreciated stock is sold, you may face:
- Federal long-term capital gains tax (up to 20%)
- Net Investment Income Tax (3.8%)
- State income tax (if applicable)
For large positions, this can feel overwhelming. The result is a “tax lock-in effect”; investors delay diversification to avoid realizing gains.
But avoiding tax at the expense of risk management can be dangerous. For example, a significant market decline could result in losses that exceed the tax cost of diversification, depending on the magnitude of the decline and an investor’s specific
circumstances.
The objective is not to eliminate taxes. The objective is to manage them strategically while reducing risk.
A Practical Framework for Reducing Concentration Risk
Rather than jumping into complex strategies immediately, begin with three simple questions:
What percentage of my total net worth is tied to this stock?
- What percentage of my total net worth is tied to this stock?
- What would happen to my retirement plan if the stock declined 40%?
- Is my employment income also dependent on this company?
This clarity often reframes the decision.
If your career, compensation, and portfolio are all tied to one company, your financial exposure may be far larger than you realize.
Strategy 1: Gradual, Intentional Selling
Tax strategy must align with portfolio construction. Asset allocation without tax awareness is incomplete planning.
The most straightforward approach is often effective: sell systematically over time.
Instead of liquidating all at once:
- Spread sales across multiple tax years
- Stay within favorable capital gains brackets
- Offset gains with harvested losses
- Align sales with lower-income years
This reduces both tax shock and market timing risk.
It may not feel sophisticated, but a disciplined approach can help manage tax exposure
and portfolio risk over time.
Strategy 2: Use Tax-Loss Harvesting to Reduce the Bill
Tax-loss harvesting can be an effective portfolio management tool when implemented
appropriately. If you hold other investments at a loss, selling those positions can
generate capital losses that offset gains from selling concentrated stock.
Benefits include:
- Lower net taxable gains
- Improved after-tax proceeds
- Better portfolio positioning
This strategy is particularly effective in volatile markets, where temporary price dislocations may result in realizable losses.
Strategy 3: Donating Appreciated Stock
If philanthropy is part of your financial plan, donating appreciated shares can be tax-
efficient, depending on individual tax circumstances.
By contributing stock directly to a donor-advised fund (DAF):
- You may avoid capital gains tax on the donated shares
- You may receive a charitable deduction (subject to limits)
- You reduce portfolio concentration
This approach aligns financial optimization with charitable intent.
Strategy 4: Exchange Funds for Diversification Without Immediate Tax
Exchange funds allow investors to contribute highly appreciated stock into a pooled
fund in exchange for diversified holdings.
Advantages:
- Diversification within the fund structure
- Capital gains deferral
- Access to broader market exposure
Considerations:
- Long holding periods (often 7+ years)
- Limited liquidity
- Accredited investor requirements
- Less transparency
Exchange funds can work well for large positions but require careful evaluation.
Exchange funds are complex, pooled vehicles and may involve underlying concentration risk, structural limitations, and offering-specific restrictions. They are not suitable for all investors and require careful review of the offering documents.
Strategy 5: Options-Based Hedging
Accumulation is only half the equation. Decumulation strategy determines sustainability.
If selling feels premature, hedging may provide temporary protection.
Common techniques include:
- Protective puts
- Covered calls
- Collar strategies
A collar strategy, for example, sets a floor under your stock while limiting upside
potential. It may reduce volatility while deferring capital gains recognition; however, outcomes depend on market conditions, option pricing, contract structure, and
execution costs.
However, hedging strategies involve costs, structural limitations, liquidity considerations, and potential opportunity trade-offs. Options strategies are not suitable for all investors. They may result in partial participation in gains and losses in excess of premiums paid (depending on the structure) and tax complexity under IRS rules. They are tools, not
permanent solutions, and require careful evaluation based on individual circumstances.
Strategy 6: 10b5-1 Plans for Corporate Executives
Executives and insiders often face trading restrictions.
A 10b5-1 plan allows you to:
- Establish a pre-scheduled selling program
- Diversify gradually
- Reduce regulatory concerns
This structured approach removes emotion from the decision and creates accountability, though execution remains subject to market conditions and tax considerations.
Strategy 7: Charitable Remainder Trusts for Income and Diversification
For investors seeking income and philanthropy, a charitable remainder trust (CRT) can:
- Sell appreciated stock within the trust
- Provide lifetime income distributions
- Defer immediate capital gains
- Leave the remaining assets to charity
CRTs are powerful but require coordination with estate planning professionals and
careful review of legal, tax, and liquidity implications.
The Emotional Side of Concentrated Wealth
Financial decisions are rarely purely analytical.
Common psychological barriers include:
- Loyalty to employer stock
- Belief in insider knowledge
- Anchoring to past highs
- Fear of missing additional gains
These biases are natural. The key is recognizing them.
Diversification is not an admission that the company will fail. It is recognition that
uncertainty always exists.
Reinvesting Proceeds Intelligently
Selling concentrated stock creates liquidity. What you do next matters.
Proceeds should align with your long-term objectives:
- Balanced asset allocation
- Income generation needs
- Inflation protection
- Tax efficiency
Many investors allocate into:
- Broad-market ETFs
- Dividend-growth stocks
- Fixed income
- Alternative investments
- Real estate exposure
The goal is to maintain growth potential while reducing volatility associated with single- stock concentration, recognizing that all asset classes involve risk.
Timing Considerations in 2026
With ongoing discussions around tax policy and capital gains rates, timing can matter.
Consider:
- Current versus projected tax brackets
- Net Investment Income Tax thresholds
- Medicare IRMAA income brackets
- State tax exposure
Waiting for perfect clarity rarely works. Structured, phased action often proves more effective than delay, though outcomes depend on market performance and legislative developments.
When Holding May Still Make Sense
There are cases where maintaining a concentrated position is reasonable:
- The allocation remains within acceptable risk thresholds
- Estate planning includes a step-up in basis strategy
- Liquidity needs are minimal
- The stock aligns with your long-term goals
Even then, periodic reassessment is essential.
Creating a Diversification Roadmap
A disciplined plan typically includes:
- Defining a maximum acceptable concentration percentage
- Creating a multi-year reduction schedule
- Coordinating tax strategies annually
- Monitoring portfolio alignment quarterly
- Adjusting as financial circumstances evolve
Wealth preservation is rarely about one big move. It’s about steady, intelligent decisions
over time.
The Bigger Picture: Risk Management Over Tax Avoidance
Concentrated stock positions often represent success. But success can create
vulnerability.
The goal is not to eliminate taxes entirely. The goal is to:
- Reduce portfolio fragility
- Preserve long-term purchasing power
- Improve financial flexibility
- Align investments with life goals
Diversification is not abandoning your winner. It is helping protect the wealth that winner created.
If a single stock represents a significant portion of your net worth, now may be the time
to evaluate your strategy. Thoughtful, coordinated planning can reduce volatility,
manage tax exposure, and strengthen your long-term financial position, though results depend on implementation and market conditions.
Portfolios designed around structure, strategy, and disciplined execution may be better positioned to manage concentration risk than portfolios reliant on a single company.
