Investment Strategies

What is a Concentrated Position and What Can You Do About It?

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by Alli Thomas

Apr 7, 2021

If you or your spouse is a highly compensated executive who receives stock options, restricted stock units, or company stock, those investments may have grown into a significant part of your retirement savings. This is called having a “concentrated position” in your portfolio—and it’s not always a good thing.

It can be tempting to let things ride when any of your investments have appreciated. But what would happen if the market plummeted? And what are the tax consequences of cashing out those holdings?

Believe it or not, many executives have a hard time when it comes to making investment decisions that involve their company stock.

First, there may be an emotional component involved. Some executives equate company stock with company loyalty. And, selling their company stock may feel a bit like a betrayal to the company.

Second, change tends to be hard…doubly so if the company stock has skyrocketed in value. It’s hard to let go of what has been a winning investment.

What are your options for appreciated company stock?

Selling it would allow you to diversify your portfolio and reduce your overall risk. But there are also possible tax consequences involved in selling.

Does that mean you should hold the appreciated stock forever? Maybe…or maybe not.

Just because you hold a concentrated appreciated stock doesn’t mean you won’t eventually have to pay taxes on it—unless you hold it until you die. At that point, the stock would become part of your estate. You may also consider making a charitable donationwhich would allow you to bypass paying taxes on the sale.

Here are two more ideas to consider if you have a concentrated stock position:

  • Sell your stock strategically. If you have FOMO, this may help offset it. You and your financial advisor can make a plan to sell the company stock gradually over time. This can take many forms. One approach would be to sell a set number of shares every quarter. Another strategy involves selling a small percentage of your position whenever its value rises or falls by a set percentage to manage your risk exposure.
  • Gift the stock to family members who are in a lower tax bracket. If you aren’t relying on your company stock to fund your retirement, this can be an attractive option. But there are a few caveats. First, there’s the annual gift limit of $15,000 per giver per recipient (as of 2020). Second, you should also consider the recipient’s tax bracket. Your gift would be most effective if the recipient has no earned income. If the recipient does have earned income, you must plan carefully so that your gift doesn’t push them into a higher tax bracket.

Doing nothing with concentrated stock positions in your portfolio may expose you to serious risk. Consulting an experienced financial advisor is the first step in mitigating it.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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