January 26, 2023

Diversifying Concentrated Stock Positions: Creating a Roadmap

In Employer-Provided Benefits, Wealth Strategy

David Bigelow
Contributions from: David Bigelow, CFP®, MBA

As we continue exploring the road to diversifying concentrated stock positions (Part 1), you may want to ask yourself “what’s my worst acceptable scenario.” Sound dark? Well, it’s better than your worst non-acceptable scenario!

Start with setting some guard rails. For example, if you aren’t comfortable with the possibility of getting nothing from your concentrated position, it would make sense to sell a portion now and diversify, or set a floor where you’ll sell a portion in the future. If you have a position worth $1m now, and you need to realize at least $500k to meet your most important goals, that’s a good floor to be aware of and plan for now, rather than in the heat of a downturn.

Rest Stop: The Check Test

  • Make three boxes on a piece of paper.
  • On the date you vest in RSUs or inherit stock, write down the current market value in Box 1. Now write down the number of shares of stock and the ticker in Box 2.
  • Ask yourself, “if someone wrote me a check today for the amount of money in Box 1, how would I invest it?” Write the answer in Box 3.

If boxes two and three don’t match, you’ll need to diversify.

I Know I Should Diversify, But How?

Sell at Vest: When you’ve lost your way in the wilderness, the first step is to stop. Don’t compound the issue. If you find yourself further down the concentrated position road than you’re comfortable with, the first step is to stop accumulating. Practically speaking, this means selling future vests immediately upon vest. If your position becomes even more concentrated over time, it will be because of market performance, not because you compounded the issue by holding onto newly vested shares.

Once you stop (accumulating more shares), you may consider one of, or a combination of, the following strategies to diversify existing positions:

  • Price based: Like writing covered calls, you make a contract with yourself to sell X number of shares if/when the price hits Y. A good way to sell on the way up without trying to time the exact peak.
  • Goal Based: “I want to completely fund my kid’s college.” Or, “I need to save $X per year into my diversified portfolio to make my overall retirement plan feasible.” Sell enough to achieve these goals, and stress less about what remains.
  • Dollar-Value Based: “I want to save X into my diversified portfolio each year. I will do that by liquidating $X of my concentrated position each year. If price is up, I won’t need to sell as many shares.”
  • % Holding Goal: “By 202X, I will get my concentrated position down to X%.” There could be a lot of factors at play here, including individual company performance, your annual savings rate, and overall portfolio performance. It’s possible you never actually reach the goal, but the act of striving for it will do wonders for the durability of your financial plan.
  • Donating Shares: If you have highly appreciated stock with large capital gains, you can avoid realizing those gains by donating shares to your Donor Advised Fund or directly to a charity. Speak with your advisor about this option to help lower your tax bill while also diversifying.

Who Has Done This Well?

Those that truly benefit from concentrated positions are often forced to hold at the outset for a period of time, such as a vesting schedule or pre-IPO. Then, they have the emotional resolve to take a meaningful portion of their gains “off the table” by selling and diversifying the proceeds once that option is available. If they had complete control during the first phase, they likely would have sold along the way, capping their upside but reducing risk. Thus, they benefitted from the phase of required inaction, then took an appropriate amount of action in the years to follow. It’s a case of not letting perfect be the enemy of good; instead of focusing on trying to time the market perfectly, they focused on being comfortable in their perspective of what was right for them and their journey. Guided by their own personal circumstances, goals, and appetite for risk, they did not worry about the path of others while acknowledging that a storm may lie ahead.

As always, your Coldstream advisory team is here to help you define your desired journey and execute the steps to stay on course.

Insights Tags

Related Articles

April 22, 2024

Estate Changes Are Coming: Who Really Needs to Take Action?

When Taylor Swift wrote her song, You Need to Calm Down, she probably had no idea how relevant her song title would be when thinking about the Tax Cuts and Jobs Act of 2017 (TCJA) sunsetting on January 1, 2026. Headlines are setting off alarms and panic for many high-net-worth individuals. However, the TCJA sunset [...]

Becky Wilcox
Contributions from: Becky Wilcox, CFA®, MBA, FRM®, Heather Hamamoto, CFP®, CDFA®, Anne Marie Stonich, CFP®, CPA

April 19, 2024

Navigating the Impending “Sunset”: How to Prepare for Tax Changes Expected in 2026

The Tax Cuts and Jobs Act of 2017 (TCJA) ushered in numerous changes to U.S. tax law, many of which are set to expire or “sunset” on January 1, 2026. This impending shift presents both challenges and planning opportunities for taxpayers. Here’s a detailed look at the key changes and strategic planning approaches to consider: [...]

Contributions from: Anne Marie Stonich, CFP®, CPA

April 15, 2024

5 Key Players in your Estate Plan

When most people decide to start their wealth management journey, the shiny object in the room is always financial planning – and we get why! Nothing beats seeing your years of savings, short-term goals like that once-in-a-lifetime trip, and long-term goals like early retirement, all in one place and your advisor confirms your financial plan [...]

Katelyn Spangler
Contributions from: Katelyn Spangler, CFP®