Concentrated Stock Positions: An Intelligent Solution

We work with many clients who are holding a large portion of their wealth in a concentrated stock position (CSP). Whether the position resulted from compensation with stock or stock options in a publicly traded company, investing early in an IPO, or inheriting a large holding that has an extremely low cost basis, it presents a challenge in creating an investment portfolio.  

When dealing with a concentrated stock position, there are usually two goals: reduce the position in a way that fits the investor’s goals and avoids as much tax as possible; and while enacting the reduction strategies, managing the position in the investor’s portfolio in way that increases diversification and lowers the portfolio volatility that the concentration generates. 

Reducing a Concentrated Stock Position

Strategic, Scheduled Sales

Long-term capital gains taxes can make it prohibitive to sell large amounts of the stock outright. A potential strategy to mitigate this is to set a longer time frame, such as 3-5 years, and schedule smaller stock sales. The sales can be made opportunistically, to take advantage of dips in the price or years in which the potential tax burden may be lower. 

Gifting Stock to Family

The 2021 Federal gift tax exemption remains at $15,000 per individual. Gifts over this amount may mean you’ll have to file a gift tax return. For adult children or grandchildren, if they are in a lower tax bracket this can be a tax efficient way to reduce holdings as the recipient may pay lower capital gains taxes, or the tax may be eliminated altogether. Unfortunately, you can’t fund a 529 plan for education savings with stocks – the stock would need to be gifted first, then sold and the cash invested. 

Charitable Giving

Donating the stock outright to a non-profit can create significant income tax benefits. There are also more complex strategies that can be set up to achieve different goals. Donor-advised funds (DAFs) can be funded with stock, but the control over the investment pool remains with the investor. The stock is sold, the investor receives the tax benefit in the year of sale, and the proceeds can be invested so that they grow and can be liquidated at a future date to fund charitable giving. 

Trusts are another option, and they can be set up to create income for the life of the grantor with the remainder reverting the charity, or the charity can receive income for a certain period and the remainder then reverts to the trust, the investor or their heirs.  Both have tax and estate planning benefits – and these are only two types of trusts. While creating a trust is an expense, it’s also a flexible and estate planning tool. 

Managing a Portfolio Around a Concentrated Stock Position

The Traditional Way 

There are many strategies that have been developed for decreasing volatility and increasing portfolio diversification around a concentrated stock position. These usually involve complicated hedging strategies involving various financial derivatives. They can be effective, but they involve additional costs for constructing the strategies by purchasing their underlying options. 

The DeWitt Way

Portfolio optimization is a data-driven approach to analyzing investments to eliminate investor emotion and reliance on past performance when making investment decisions. The process is a repeatable set of rules to reallocate periodically and take the subjectivity out of choosing and sizing investments.

The objective is to minimize a portfolio's overall variability (or volatility) and potentially reduce protracted portfolio drawdowns. As a result, by controlling risk at the asset, sector, and security level, one can potentially increase their probability of achieving their long-term financial objectives more consistently.

Because so many of our clients have concentrated stock positions, it was a priority to ensure that our portfolios would accommodate these types of positions.

We can build portfolios calibrated around the behavior of concentrated positions. This allows investors to continue to hold the asset, lower volatility while potentially increasing return consistency, and enact the strategy of their choice in holding or reducing the position, no matter the time-frame. 

The Bottom Line 

A concentrated stock position may be a good problem to have – but it’s a problem nonetheless. We can help on both ends – setting up strategies that achieve your life goals while efficiently reducing the position, while creating effective portfolio management strategies while you are holding it.

Want to learn more about how we can help you manage a concentrated stock position?