What To Do With a Concentrated Stock Position

My co-host, Taylor Stewart, told a story on our podcast recently that gets right to the heart of what makes concentrated positions so tricky. A client came to him with essentially all of his net worth in a single stock. Taylor gave what most advisors would consider sound advice: sell at least half and diversify. The client didn't follow that advice. The stock went up eight times.

Taylor will tell you plainly: he'd give the same advice again. The client couldn't afford for that stock to get cut in half. That was the relevant fact, and the outcome doesn't change it. A good decision is evaluated at the time it's made, not by what happens next.

We're seeing more and more of these positions. Between the long run-up in U.S. equities, the rise of employer stock compensation, and a handful of mega-cap names that have become cultural phenomena, many portfolios have quietly drifted into concentration. The position started small, it grew, and now it's a big number that feels too expensive to touch.

If that sounds familiar, this post is for you.

What Counts as "Concentrated"

The textbook answer is any single position over 10% of your portfolio. But that number alone doesn't tell you much. Ten percent of a well-diversified portfolio is a different risk than ten percent of a portfolio that's ten names within the same industry, each at ten percent.

The more useful question is this: can you afford for that position to get cut in half? Can you afford for it to be worth zero? If the answer is no, you have a concentration problem. If a significant decline in that one stock would materially change your financial picture, your retirement timeline, or your ability to meet your goals, then the allocation needs attention regardless of the exact percentage.

Why People Don't Sell

In my experience, there are two main reasons people hold onto concentrated positions longer than they probably should. Fear of missing out, and fear of taxes. Both are understandable, and both can be costly.

F.O.M.O.

What if I sell and it doubles tomorrow? This is real, and it's not irrational. Nobody wants to leave money on the table. But it's worth stepping back and asking: what are the odds?

Consider this. I pulled the list of the 20 largest U.S. companies by market capitalization in 2005 and compared it to the same list today. Only five companies appear on both lists: Microsoft, Walmart, JPMorgan Chase, ExxonMobil, and Johnson & Johnson.

2005 Top 20 included names like General Electric, Citigroup, AIG, Intel, Pfizer, Bank of America, and IBM. All household names. All companies that seemed like sure things at the time.

Today's Top 20 is dominated by companies that either didn't exist or were in their infancy twenty years ago: Nvidia, Apple, Alphabet, Amazon, Meta, Tesla, Broadcom.

GE was broken up. AIG and Citigroup were casualties of the financial crisis. Intel missed the AI wave and was replaced by Nvidia. And the new entrants? Nobody was picking Nvidia as one of the top five companies in 2005.

The point isn't that today's bohemoths will necessarily fall off the list. It's that market leadership turns over far more than we tend to think. We attribute narratives to history that make the outcomes feel obvious in hindsight, but they weren't obvious at the time. Picking the next twenty years of winners is extraordinarily difficult, and that difficulty is precisely why diversification exists.

There's also the matter of survivorship bias. For every concentrated position that worked out spectacularly, there are many more that didn't. We just don't hear those stories as often. It's the same dynamic as casinos: everyone knows someone who won big, but nobody talks about the losses.

Taxes

The other reason people hold on is the tax bill. If you bought a stock for $100,000 and it's now worth $1,000,000, selling means recognizing $900,000 in capital gains. Taxed at 20%, that’s $180,000 to Uncle Sam plus state tax.

But there's a framing problem here that's worth confronting directly. If you're holding a $1,000,000 position with $900,000 of embedded gain, you don't really have $1,000,000. You have something closer to $800,000 after taxes. That's your number. The tax liability already exists; you just haven't settled it yet.

Once you anchor on the after-tax value, the math starts to look different. You're not "losing" $200,000 by selling. You're paying a known, fixed cost (the tax) to eliminate an unknown, potentially much larger cost (a significant decline in the stock). Being willing to accept 50% downside risk to avoid a 20% tax bill isn't logically consistent.

And at the most basic level: if you're paying capital gains taxes, you made money. That's a good outcome.

What You Can Actually Do About It

Once you've decided that a concentrated position needs attention, there are a number of tools available. Some are straightforward, some are more specialized. The right approach depends on your specific situation, your time horizon, and what you're trying to accomplish.

Sell and Diversify

This is the most direct option. Sell some or all of the position and reinvest in a diversified portfolio. If the investment allocation doesn't align with your goals and risk tolerance, the clearest path is to adjust it.

Should you do it all at once or spread it out? The evidence generally favors getting it done. If you can't afford the downside risk today, carrying that risk for another year just to save a few percentage points in taxes may not be worth it.

That said, there are situations where phasing makes sense. If you're close to a tax bracket threshold, splitting the sale across two tax years could keep you in a lower capital gains bracket. If you're in November or December and can split the sale across a couple of months into two tax years, the savings may be meaningful. Just be honest about whether you're making a tax-smart timing decision or procrastinating.

Tax-Loss Harvesting

If you have losses elsewhere in your portfolio, those losses can offset some of the gains from selling a concentrated position. This won't eliminate the tax bill entirely, especially if the position is very large relative to your other holdings. But it can take the edge off, and it's worth checking before you sell.

The caveat: don't wait around for losses to materialize. If the allocation decision has already been made, waiting for a loss harvest is another way of letting the tax tail wag the dog.

Donating Appreciated Stock

If you're already making charitable contributions, donating appreciated stock directly to a charity or to a donor-advised fund is one of the most tax-efficient moves available. You avoid paying capital gains tax on the appreciation, the charity receives the full market value of the shares, and you may receive a charitable deduction for the fair market value.

This doesn't help you if you need the money for yourself, but if giving is already part of your plan, directing appreciated stock toward that goal instead of cash is almost always the better move.

Charitable Remainder Trusts

For those who want both income and a charitable component, a charitable remainder trust can be a useful structure. You donate the appreciated stock to the trust, which then sells the shares without triggering immediate capital gains. You receive a partial charitable deduction at the time of the contribution and can diversify the holdings within the trust. The trust pays you (or you and your spouse) a defined income stream for life or a set period of years. When the trust terminates, the remainder goes to charity.

This is a more complex strategy that involves legal costs and irrevocable decisions. But for the right situation, particularly a large position where you still need ongoing income, it's worth exploring with your advisor and estate attorney.

Step-Up in Basis

When you die, your heirs receive your assets at their current market value rather than your original cost basis. In our example, if you bought at $100,000 and it's worth $1,000,000 at your death, your heirs' basis would be $1,000,000. If they sell immediately, there's no gain and no tax.

This is a legitimate planning tool, particularly for someone late in life. But I see it misused as a justification for holding concentrated positions indefinitely. If you're in your early 60s and entering retirement, "I'll hold it for the step-up" could mean carrying concentration risk for 20 or 30 more years. Go back to the top-20 list: would you bet on any single company over that time horizon?

Step-up in basis should be a factor in the decision, not the decision itself.

Securities-Based Lending

If you need liquidity but don't want to sell, you can borrow against the value of your portfolio. This is sometimes called a securities-based line of credit or a margin loan. You pledge your holdings as collateral and receive cash, typically up to about 50% of a diversified portfolio's value (less for a single concentrated name, often around 35%).

This can make sense for short-term needs. Bridging a home purchase before your current house sells. Funding a business opportunity. Covering a gap of a few months. You're paying interest on the loan, but you're not triggering a taxable event.

Where this goes wrong is when people treat it as a long-term lifestyle funding strategy. You still owe the money, you're paying interest, and the collateral can lose value. If the stock drops significantly, you may face a margin call that forces you to sell at the worst possible time. Use it as a bridge, not to fund a lifestyle.

Exchange Funds

This is a less well-known option, but it's worth understanding. An exchange fund (sometimes called a swap fund) is a privately offered partnership where multiple investors contribute their individual concentrated positions into a pooled vehicle. In exchange, each investor receives a share of the diversified pool.

The key benefit is that contributing your stock to the fund is generally not a taxable event. You get immediate diversification without triggering capital gains. The trade-off is that you're locked in for a set period (typically seven years), you don't control the specific holdings in the pool, and these funds are available only to qualified purchasers with significant minimums.

Exchange funds don't eliminate the tax; when you eventually exit, your original cost basis carries over to the new positions. But they can be a useful tool for getting diversified now and deferring the tax to a more favorable time if you don’t need access to those funds now.

A Note on Insider Confidence

One pattern worth flagging: many concentrated positions come from employer stock. RSUs, stock options, or equity compensation that grew significantly over time. These holders often have genuine insight into the company. They've seen the product roadmap, they believe in the leadership, and they may have good reason to be optimistic.

But being on the inside doesn’t always give you the most objective perspective. And the concentration risk is compounded: your income, your benefits, and now a large share of your net worth are all tied to the same company. If that company stumbles, you could lose your job and see your portfolio decline at the same time.

This doesn't mean you should panic and sell everything. But it does mean your advisor should be comfortable playing devil's advocate, and you should be open to hearing it.

The Bottom Line

Concentration is how many fortunes are built. It's also how many fortunes are lost. Diversification guarantees you won't be the best performer, but it also guarantees you won't be the worst.

If you have a concentrated position, the first question isn't about taxes or strategies. It's simpler than that: can you afford for this stock to get cut in half? If the answer is no, the rest are details.

The tax implications are real, but it's a known cost. The downside risk is unknown and potentially much larger. And by not making a decision, you are making one: you're choosing to stay concentrated.

That's a choice worth making deliberately, with clear eyes, rather than one you drift into because the tax bill feels too big or the stock might keep going up.

This post is based on a conversation from our podcast, Make the Most of Your Money. You can listen to the full episode on concentrated stock positions here.

This is for informational purposes only and does not constitute personalized investment, tax, or legal advice. Consult with your financial advisor and tax professional before making decisions about concentrated positions.