Concentrated Stock Position Strategies +
Diversified Concentrated Stock Positions

November 9, 2022

Covered Call Strategy

Diversification of concentrated stock positions is one of the most important investment principles you can implement in your investment strategy. It focuses on spreading your money or exchange funds in a concentrated position across various asset classes that affect different parts of the economy.

Diversified investments have the potential to reduce risks associated with a single stock asset, industry, or market. It can be especially helpful for lowering your risk due to abnormal events, such as disruptions to the financial markets or economic crises.

Yet, many investors don’t diversify a concentrated portfolio enough. This can be especially true when it comes to concentrating on individual stocks. In this article, we’ll show you how to diversify your portfolio. We’ll also give tips on building a well-diversified portfolio, even if your budget is limited. Read ahead to learn more!

What is a Concentrated Stock Position (CSP)?

A concentrated stock position, or any large stock accumulation in one firm compared to the investor's total wealth, can be a risk associated with an otherwise diversified investment portfolio. This can occur if a person has worked for the company for a long time and it is their primary source of income.

Individuals such as executives and early investors can have "locked up" a significant portion of capital gains of their total investable assets in a single stock, which places them in a concentrated stock position.

A significant amount of an investor's available capital is invested in a single security can have dire consequences. These consequences manifest themselves in the form of risks related to diversification, tax ramifications, and liquidity in the fair market value. We provide service to investors with concentrated stock positions in effectively managing the risks associated with those positions. We assist investors in incorporating their significant roles into a well-diversified portfolio.

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Understanding Capital Gains Taxes

When an investor sells a security for a profit, that profit is considered a capital gain. Therefore, Capital gains taxes are calculated as a percentage of the difference between the sale price and your original cost basis.

In some cases, the amount of a capital gains tax owed on capital gains can be reduced if you have made other investments that qualify for tax deferral.

You may be able to offset some of your immediate capital gains tax with losses from other investments. The amount of tax you pay on capital gains can vary depending on the length of time that you held the investment and your tax bracket. When you sell a security, the IRS considers what your original purchase price was for that security. This price is known as your cost basis (CB).

The difference between this amount and the amount you sell it for is considered capital gains, which are taxed at a rate of 20% for most investors.

Some adjusted gross income or your past performance can incur a tax deduction and credits that reduce your tax bill. For example, if you are married and filing jointly with an AGI of $75,000 or less, you can deduct up to $3,200 in state income taxes on your federal return. If you have children who qualify for the child tax credit or earned income tax credit (EITC), these are additional deductions that can help lower your tax liability.

Understanding the risks

Investors' exposure could result from excessive (and potentially unequal) exposure to market risk. If you have a significant amount of wealth invested in a single stock or in concentrated stock holdings, the worst thing that might happen is that the firm you invested in goes bankrupt and the value of your shares sinks to zero. That would either completely wipe out or badly compromise the financial future of a lot of people.

The possibility that the company would underperform over an extended period of time is one that is less visible but more common. This may be the result of the company is poorly managed, being subject to excessive regulation, or operating in an industry that has fallen out of favor. In this scenario, the stock holding, which was formerly an asset that contributed to the generation of wealth, transforms into a liability instead.

Owning a single concentrated position typically exposes an investor to a greater degree of market risk. When cash is needed, and the sale of the stock is necessary to raise funds, the danger of price fluctuation is extremely severe. The likelihood of the stock being sold at a price that is lower as a result of its volatility increases.

Understanding the risks of having a concentrated stock position is imperative to protect your asset and wealth in the long run.

How to manage concentrated stock positions?

Large stock holdings can be emotional. Selling shares in a company you spent your life in might be difficult. And we understand! Profitable stocks frequently have diversified portfolio positions and a market-beating stock can be hard to sell.

However, relying on one company to fulfil financial goals risks portfolio valuation, volatility, liquidity, and sector slowdowns or unfavorable legislation. Large firm setbacks could affect long-term financial strategies.

If the concentrated position's equity falls, your job may be at stake. Investing all your money in one company is risky. To mitigate the risks we mentioned above, you can make use of the following investment strategies to diversify your concentrated position.

Selling Shares Incrementally

When trying to reduce a concentrated stock position, the selling of shares may be the approach that is the most effective and easiest to do. Tax implications, potential market impact, reinvestment of proceeds, and the timing of sales are all issues that need to be considered within the perspective of a coordinated plan for personal wealth management.

Factors to consider might be necessary for the event that your shares are subject to the restrictions imposed by Rule 144 (or are restricted in some other way). For instance, it may be appropriate to submit a 10b5-1 plan in order to illustrate your selling decisions in advance while also providing a formula to limit the trading of the shares over a certain period of time. This would be done in order to comply with applicable regulations.

You and your financial advisor might also wish to talk about the possibility of establishing a blind trust. A trustee with discretion may be appointed to oversee a blind trust. This trustee has the authority to decide when, how much, and at what price the trust's assets will be sold. A trustee may also contemplate the implementation of a number of other hedging measures.

Exchange Funds

Exchange Funds, often known as "Swap Funds," are limited partnerships or limited liability companies that accept private placement investments. An investor is able to "exchange fund" one stock for shares in a collective fund that contains a variety of stocks by using these vehicles.

The funds are managed in such a way that the stocks come from a variety of various industries and sectors in order to give instant diversification. In the event that the value of your initial stock goes down, you will still have the value of the diversified stock. When using an Exchange Fund, it is also possible to invest the initial amount of the stock without having to first sell it, pay the associated taxes, and then invest the remaining amount.

Using exchange funds is subject to a number of significant restrictions. To qualify as a Qualified Purchaser, an individual must demonstrate they have at least $5 million in assets that can be invested.

In addition, there are lock-up intervals that can last for up to seven years, there is a possibility that dividends will be lost, and there are also fund administration expenses. If the value of the original stock that was traded does better than the value of the fund, the investor is still left with the value of the fund.

Last but not least, the investor does not need to sell the stock in order to retain the original cost structure of the stock when it is transferred to the new fund position because diversification reduces the need to sell. However, for investors who meet the requirements, exchange funds present a workable alternative for diversifying a concentrated stock position.

Donate Your Shares

If you make a contribution of highly appreciated shares to a charitable remainder trust (CRT), you may be entitled to claim a tax credit for the amount of the contribution made in the year it was made. The future payout rate of the trust can be handled in a way that is favorable to either the income objectives or the tax planning.

Donations made to the trust would be considered irreversible and might be sold at a later date in order to generate income or broaden the trust's investment portfolio. In the majority of cases, the immediate payment of capital gains tax at the same time of sale would not be triggered by these transactions.

In addition to charitable remainder trust, there are also various donation strategies that can be used to manage concentrated positions; however, these strategies frequently include additional risks, expenses, and complexity.

Charitable Gift Annuities

Those individuals who are in need of money may find that a charitable gift annuity is appealing. The charitable organization will take the donated stock and use the revenues to establish a lifetime income stream in the form of an annuity for the donor. The donor is awarded a partial tax deduction as well as income for the rest of their lives. After the death of the donor, the charity is entitled to keep any remaining funds.

Donor-Advised Funds

Donor-advised funds, known as DAFs, are a kind of donation that is extremely flexible. DAF can be funded using stock, and the investor may be eligible for tax deductions equal to the value of the shares at the time the DAF is created. After the sale of the shares, the investor will direct the funds to be placed in investment pools that they will manage. The account has the potential to expand as a result of the investment options, which include varied pools of stocks, bonds, and money market investments. When the donor is ready, they instruct the DAF to distribute the funds that were accumulated in the investment pool to the charitable organizations of their choosing. When an investor contributes money to a donor-advised fund, they are able to "bank" future donations to a charitable organization while simultaneously enjoying a tax benefit.

Direct Gift of Stock

Making gifts to loved ones is an excellent tactic for lowering stock holdings in conjunction with financial gains. Donating stock directly to charitable organizations continues to be a popular alternative. You can minimize your overall stock position and increase the likelihood of receiving a tax benefit if you donate stocks rather than cash. The whole fair market value of the stock can be deducted from the donors' taxable income up to the limit of thirty per cent of their annual adjusted gross income. You benefit by lowering your exposure to potential capital gains, and the charity benefits by being able to sell the stock without having to pay any taxes on the proceeds because it is a non-profit organization.

Gift Shares of Stock to Relatives

Speaking of gift giving, one common way of donating is through giving shares of stock to members of your own family or to your children. This works particularly well in situations in which the children have already reached adulthood and the stock owner is still providing financial assistance.

One example is providing financial support to a child so that they can make a down payment on a real estate property, buy a car, or go on an expedition overseas. After that, the children can sell stock and use the money they make. Because it is quite likely that the children will be at a far lower tax rate, the capital gains taxes may be reduced or even removed entirely.

Each person is permitted by the federal government to give away up to $16,000 annually to a single recipient without having to file a gift tax return until the year 2022. Thus, a couple can give a total of $32,000 to each of their children as a present each year.

Leveraging Hedging Strategies for the Position

You might potentially protect yourself from a big loss in stock value by employing either a single option or numerous options combined. For instance, acquiring a put option is comparable to purchasing insurance against the possibility of a loss in the value of your stock. An investor has the right, but not the responsibility, to sell all or a fraction of his or her stock at a specified price when they purchase a protective put option. In a manner comparable to insurance, the value of an option may expire worthless if the market of the underlying stock increases. For this reason, the purchase of puts should never be considered outside of the context of an overall strategy.

In addition to acquiring put options, selling call options tied to the underlying stock position can give revenue (as well as some degree of price protection) against a decrease in the value of the underlying share investment. Because selling call options restricts involvement in future price growth, it ought to be viewed as a component of a more comprehensive and methodical approach.

Option combinations are something else that should be taken into consideration too. For instance, a cashless collar combines the two techniques discussed above, buying protective while also selling call options. According to the market's pricing and parameters, the premiums collected from the sale of call options may or may not entirely offset the cost of purchasing a put option, hence the "cashless" reference to the transaction.

Stock Protection Plans

Stock Protection Plans (SPPs) are a very recent addition to the market. These functions are more akin to those of diversifiers than insurers. The SPP sees investors who hold stock in various businesses pool together cash equal to 10% of the value of their stocks to purchase protection for the assets they have purchased. The investors are required to pay a 2% upfront charge and a 2% annual fee for the investment period of five years.

The majority of the cash is currently placed in Treasury Notes with a maturity of 5 years. After five years, if the value of a stock has decreased, the holder of that share will get compensation from the fund. The difficulty arises if a recession takes place when almost all stock prices fall. If this takes place, there will likely not be sufficient assets in the fund to recompense everyone, and the protection afforded to the owners will not be adequate.

These funds are extremely new, thus it is necessary to conduct thorough due diligence on them. However, it could work for an investor with a time frame suitable for protecting a company's value. In addition, because the stock is not sold or leased, the owner keeps all of the associated rights, including voting, dividends, and ownership.

The costs involved in an SPP can be considered one of its drawbacks. It is a waste of money to pay 12% for five years of insurance when there is a possibility that it will not function if the market declines. Another disadvantage is that if the company's value continues to rise after five years, you may have a more difficult time diversifying your holdings than when you began with higher embedded profits. Investigate Stock Purchase Plans in great detail, and ensure that your circumstances are of the kind that would benefit from taking part in them.


Some investors could view concentrated stock positions as a positive solution, but these positions do come with a large amount of potential risk. In addition, they should be included in a comprehensive and diversified investment portfolio for the best possible risk management.

Mariner Wealth Advisors provides access to expert resources that can evaluate your present conditions. and circumstances! We will work to devise a plan that is tailored to your goals, your time frame, the way in which your securities are titled, and any restrictions that may apply. In addition, we will keep in mind your investment goals, including any aspirations you may have regarding charitable donations and more! Contact us to learn how we can help you!

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