Financial Planning

Jarrett E. Hindrew, CFP®, ChFC®, CLU®, Financial Advisor

Investors often acquire concentrated stock positions through various means, such as being senior executives, board members, employees receiving company stock as compensation, or individuals investing in high-growth stocks. Inheritance of a large stock position can also lead to concentration.

When a single stock position represents 10% or more of an investor's total wealth, the associated risk typically outweighs potential incremental returns compared to a diversified portfolio. Additionally, if the stock has seen significant appreciation, there may be unrealized capital gains to consider. Managing a concentrated stock position involves overseeing a substantial portion of one's investment portfolio in a few assets, which can be risky due to its heavy reliance on the performance of those specific assets. To address the risks and potentially enhance returns associated with concentrated positions, investors can employ various strategies.

1. Diversification and Gradual Selling

Diversification involves spreading investments across different asset classes, sectors and industries to reduce risk. Gradual selling involves systematically reducing the concentrated position over time. Here are some ways to achieve this:

• Systematic Selling Plan: Develop a plan to sell a fixed percentage of the stock at regular intervals. This can help minimize market impact and spread out tax liabilities. Work with a tax advisor to manage the tax implications of selling large stock positions.


• Separately Managed Accounts (SMAs): These accounts allow for a staged diversification strategy, reducing concentration over time while managing sector and industry exposure. Direct indexing is an investment strategy that involves purchasing the individual components of a particular index, such as the S&P 500, rather than buying an index fund or exchange-traded fund (ETF) that replicates the index. This approach allows investors to own the underlying stocks directly, providing more customization as well as the ability for more efficient tax loss harvesting compared to traditional index investing. By directly owning individual stocks, investors can tailor their portfolio to align with their preferences, such as excluding certain companies or emphasizing specific sectors.


• Mutual Funds and ETFs: Investing in mutual funds or ETFs can provide instant diversification across a broad range of assets.

2. Options Strategies

Options strategies are contracts that give the buyers the right, but not the obligation, to buy or sell an underlying asset at a set price and date. The following strategies can be implemented to help manage risk and generate income:

• Protective Puts: Buying put options while holding the stock limits downside risk while allowing for capital appreciation. However, the cost of premiums should be considered.


• Collars: This involves holding the stock, buying a put option and selling a call option. It limits both downside risk and upside potential, with the premium from the call offsetting the cost of the put.


• Covered Calls: Writing call options on the stock generates income but limits upside potential. This strategy is useful if you expect low volatility.

3. Asset-Based Lending

Asset-based lending is commonly viewed as a short-term strategy to boost liquidity and offer immediate purchasing power without creating a taxable event. By leveraging borrowing, individuals with concentrated stock positions can utilize their assets as collateral to secure loans. The resulting proceeds can then be used to purchase securities, fund alternate investments, or cover personal lifestyle expenses.

• Securities-Backed Loans: These loans use your stock as collateral, providing liquidity without selling the stock. This can be useful for funding other investments or covering expenses.


• Risks: Be aware of the risks, especially during periods of high volatility, as the value of the collateral can fluctuate.

4. Charitable Giving

Charitable giving can provide tax benefits and help diversify your portfolio:

• Charitable Remainder Trusts (CRTs): Transfer stock to an irrevocable trust, receive an income stream, and get an immediate tax deduction. The trust sells the stock without incurring capital gains taxes.


• Pooled Income Funds: Donate to a nonprofit's pooled fund, receive income for life, and get a partial tax deduction. The fund invests the donations and pays out income to donors.


• Donor-Advised Funds (DAFs): Make an irrevocable gift to a fund, receive an immediate tax deduction, and recommend how the fund invests and donates the money over time.

5. 10b5-1 Plan for Executives

10b5-1 Plan is a trading plan established by company insiders to buy or sell their company’s stock based on a predetermined criterion, allowing them to trade without violating insider trading regulations. Here are some additional insights:

• Legal Protection: By adhering to a pre-established plan, insiders can avoid accusations of insider trading, as trades are made based on predetermined criteria rather than insider knowledge.


• Predictability and Flexibility: These plans allow insiders to plan their trades in advance, providing a structured approach to managing their stock holdings. While insiders cannot change the plan based on new material information, they can design the plan to include various criteria such as specific dates, prices, or quantities.

By implementing these strategies, you can effectively manage the risks associated with concentrated stock positions while optimizing returns and safeguarding your wealth. It is advisable to consult with your financial advisor as well as your tax advisor to explore which options are suitable based on your goals and objectives.