There is a particular kind of client who arrives at our office with a portfolio that looks, on the surface, like enormous success. They own $8 million in a single stock — the company they founded, or joined early, or inherited from a parent who had the foresight to buy Nvidia in 2016. Their net worth, on paper, is exceptional. Their diversification is catastrophic.
This is the concentrated stock problem. It is one of the most common and most psychologically difficult issues in private wealth management. The J.P. Morgan Private Bank estimates that roughly 35% of high-net-worth individuals hold more than 25% of their investable assets in a single equity position. A UBS study puts the figure even higher among founders and corporate executives. The problem is pervasive, well-understood by advisors, and yet remarkably resistant to resolution — because the obstacles are not primarily financial. They are emotional.
Why concentration persists
The standard explanation is taxes. If you bought Amazon at $18 a share and it is now trading at $185, 90% of the position is embedded capital gain. At a combined federal and state long-term capital gains rate of 23.8% (for Florida residents, who pay no state income tax), selling the entire position would send roughly $3.8 million to the Treasury on an $18 million gain. That is not a trivial check. It is rational to want to avoid it.
But taxes are often the stated reason, not the real reason. The deeper drivers are psychological:
Identity attachment. For founders and early employees, the stock is not just a financial instrument. It is a monument to a period of their life that was difficult, uncertain, and ultimately triumphant. Selling feels like renouncing the achievement. Behavioral finance researchers, including Terrance Odean at UC Berkeley, have documented that investors hold concentrated positions far longer than any rational tax-deferral calculus would justify — and the strongest predictor of holding is emotional attachment, not embedded gain.
Anchoring and overconfidence. If a stock has gone from $20 to $200, the owner's base rate for its future performance is conditioned on that extraordinary history. The fact that past performance is uncorrelated with future returns — demonstrated repeatedly in the academic literature, from Fama and French (1993) through Bessembinder (2018) — does not penetrate a conviction that was formed by lived experience rather than data. Bessembinder's study is particularly sobering: he found that just 4% of listed stocks accounted for the entire net gain of the U.S. stock market from 1926 to 2016. The other 96% collectively matched Treasury bills. Owning a concentrated position is, statistically, a bet that your single stock is in the 4%.
Loss aversion on the tax bill. Daniel Kahneman and Amos Tversky's prospect theory tells us that the pain of a loss is roughly twice the pleasure of an equivalent gain. A $3.8 million tax payment feels like a $7.6 million loss, even if the diversified portfolio it funds is objectively superior on a risk-adjusted basis. This asymmetry keeps people frozen.
When is concentration actually dangerous?
There is no universal rule, but there are useful guidelines. Most wealth managers consider a position “concentrated” when it exceeds 10% of a client's investable assets. At 25%, it is a significant portfolio risk. At 50% or above, it is an existential financial risk — the kind that can permanently impair a family's standard of living if the stock declines substantially.
The math on single-stock volatility is unambiguous. The average individual stock in the S&P 500 has an annualized standard deviation of approximately 30%, compared to roughly 15% for the index as a whole. That means a single stock is, on average, twice as volatile as a diversified portfolio — and the distribution of outcomes is far more skewed. A diversified portfolio might lose 30% in a severe bear market. A single stock can lose 80% and never recover. Enron. Lehman. GE's decline from $60 to $6. These are not edge cases. They are the natural variance of concentrated equity risk.
For Florida residents, the absence of a state income tax is a modest tailwind. The combined long-term capital gains rate for a high earner is 23.8% (20% federal plus 3.8% Net Investment Income Tax), compared to 33.3% or higher in California or New York. This lower rate makes the after-tax cost of diversification meaningfully less punishing — and should factor into the decision calculus. We model this using our Florida-specific tax calculator.
The toolkit: strategies for reducing concentration
There is no single solution. The right approach depends on the size of the position, the embedded gain, the client's liquidity needs, their charitable inclinations, and their timeline. Here are the primary tools, in rough order of complexity.
1. Systematic direct sales with tax-loss harvesting offsets
The simplest approach: sell a portion of the concentrated position each quarter or each year, and offset the resulting capital gains with harvested losses elsewhere in the portfolio. This is not glamorous. It is effective.
A well-managed taxable portfolio of $5 million can typically generate $100,000 to $300,000 in harvested losses per year, depending on market conditions. Those losses offset gains dollar-for-dollar, allowing you to sell that amount of the concentrated position each year with zero net tax impact. Over five to seven years, you can reduce a 40% position to 10% without writing a single check to the IRS beyond what you would have paid anyway.
This approach requires patience and a systematic calendar. It is the foundation of most concentration-reduction plans. For more on how we approach this, see our article on tax alpha.
2. Charitable giving: donor-advised funds and charitable remainder trusts
If a client has charitable intent — and most high-net-worth families do — donating appreciated stock is among the most tax-efficient strategies available. Donating long-term appreciated securities to a donor-advised fund (DAF) allows the donor to take a fair-market-value deduction (up to 30% of AGI for appreciated property, per IRC Section 170) while avoiding capital gains entirely. The charity receives the full value. The IRS receives nothing.
For larger positions, a charitable remainder trust (CRT) offers a more structured approach. The client transfers appreciated stock into an irrevocable trust, which sells the stock tax-free (because the trust is a tax-exempt entity), reinvests the proceeds in a diversified portfolio, and pays the client an income stream for life or a term of years. At the end of the term, the remainder goes to charity. The client receives a partial charitable deduction at the time of contribution, an income stream that can be designed for their needs, and immediate diversification of the concentrated position — all without recognizing the embedded gain.
A CRT is not a panacea. The assets are irrevocable — they are leaving the client's estate. The income stream is taxed as ordinary income to the extent of trust income, and the economics depend heavily on the Section 7520 rate (the IRS discount rate used to value the remainder interest). At current rates, CRTs are reasonably attractive for clients over age 55 with significant philanthropic intent.
3. Exchange funds
An exchange fund (also called a swap fund) is a limited partnership that allows multiple investors to contribute concentrated positions in different stocks and receive, in return, a pro-rata interest in the diversified pool. The contribution is structured under IRC Section 351 to be a tax-free exchange — no gain is recognized at the time of contribution.
The investor holds the partnership interest for a minimum of seven years (the “diversification period” required by Section 351(e)), after which they can redeem their interest in a diversified basket of securities. The embedded gain carries over to the new cost basis, so taxes are deferred, not eliminated — but the investor achieves diversification without a current tax event.
Exchange funds are offered by firms like Goldman Sachs, Eaton Vance, and several smaller managers. Minimum investments are typically $500,000 to $1 million. The annual management fee is usually 75 to 100 basis points — not cheap, but often justified by the tax deferral. The key limitation: the fund must hold at least 20% of its assets in qualifying non-stock investments (typically real estate), which introduces some illiquidity and return drag.
4. Prepaid variable forwards
A prepaid variable forward contract allows the stockholder to receive an upfront cash payment (typically 75–90% of the stock's current value) in exchange for delivering shares at a future date (usually two to five years). The transaction is structured so that no taxable event occurs at initiation — the gain is deferred until the shares are delivered.
This is a sophisticated tool. The client gets immediate liquidity and downside protection (the cash is received upfront, regardless of what the stock does), while deferring the tax recognition event. The trade-off: the client gives up upside above a capped price, and the economics are sensitive to interest rates and the stock's implied volatility. These are typically available only for large, liquid public-company stocks and require minimum positions of $2 million or more.
5. Rule 10b5-1 trading plans
For corporate insiders — officers, directors, and significant shareholders — who are subject to trading restrictions and blackout periods, a Rule 10b5-1 plan provides a structured, pre-determined schedule for selling shares. The plan is established in writing when the insider does not possess material nonpublic information, and the trades are executed automatically according to the plan's parameters.
The SEC's 2023 amendments to Rule 10b5-1 (effective February 2023) tightened the requirements: plans now require a 90-day cooling-off period for officers and directors, a good-faith certification, and limitations on overlapping plans. These changes make advance planning more important, not less. A 10b5-1 plan is not a tax strategy per se — it is a compliance framework — but it is an essential component of any diversification program for insiders.
6. Hedging with options
Protective puts and costless collars (buying a put while selling a call at a higher strike) can reduce downside risk without triggering a sale. The collar effectively establishes a floor and a ceiling on the position's value. The economics depend on the stock's volatility, the width of the collar, and the time horizon.
The tax treatment of options on concentrated positions is complex. Under the constructive sale rules of IRC Section 1259, certain hedging transactions can be treated as sales for tax purposes. A collar that is too narrow — where the floor and ceiling are too close together — risks being recharacterized as a constructive sale, which would trigger the embedded gain. The IRS has not provided bright-line guidance on how wide the collar must be, which means this strategy requires careful structuring and qualified tax counsel.
Building a diversification timeline
The most important thing we do for clients with concentrated positions is not selecting the right tool. It is building a timeline. The single greatest mistake in concentration management is trying to solve the problem in one trade. That almost always means paying more tax than necessary, or worse, doing nothing because the one-trade solution is too painful.
A typical diversification plan might look like this:
Year 1: Donate 5% of the position to a donor-advised fund (immediate deduction, no gain recognized). Sell 5% and offset with harvested losses. Net reduction: 10%. Net tax cost: near zero.
Year 2: Contribute $1 million to an exchange fund. Sell another 5% with loss offsets. Net reduction: additional 10–15%.
Year 3–5: Continue systematic sales of 5–7% per year, funded by ongoing harvesting. Consider a CRT if the client's philanthropic plan has matured.
Year 5–7: Exchange fund reaches diversification period; redeem in diversified basket. Position is now 10–15% of portfolio. Risk is manageable. No single year involved a tax event that dominated the client's return.
The cumulative effect: a position that was 45% of the portfolio is reduced to 10–15% over five to seven years, with total tax costs that are a fraction of what an immediate liquidation would have required. This is not clever. It is patient. And patience, in wealth management, is the most underrated strategy.
The goal is not to eliminate the position. It is to reduce it to a size where its success is a bonus, not a necessity, and its failure is a setback, not a catastrophe.
What we tell clients
We begin every concentration conversation with a simple question: “If you had $8 million in cash today, would you put it all in this one stock?” The answer is almost always no. That gap between what you would do with new money and what you are doing with old money is the concentrated stock problem in its entirety. The rest is execution.
We manage the execution. We build the timeline, coordinate with tax counsel, model the scenarios, and make the trades. The client's role is to make the strategic decision — how much risk they are willing to hold, how much they want to give to charity, and how quickly they want to diversify. Everything else is our responsibility.
If you hold a concentrated position and are not sure where to begin, we are happy to model your specific situation. You can review our case studies for examples of how we have approached similar situations, or begin a conversation directly.