Do You Own Too Much of One Stock? Here’s How to Measure and Manage the Risk

October 2, 2025

Imagine this: you’ve been with your company for 20 years and most of your retirement savings sit in its stock. Or maybe you bought shares in a well-known tech name a decade ago, and the position has grown into the majority of your portfolio. In both cases, you may feel proud of the growth and loyalty, but you’re also exposed to what wealth professionals call concentration risk.

When a single stock dominates your wealth, your financial future rises and falls with that company. For U.S. investors, this risk is more than theoretical. Taxes, retirement planning, and even estate goals can all be disrupted if one position loses value. History shows that employees and long-term shareholders in once-prominent companies have seen years of savings eroded when fortunes changed unexpectedly.

The reality is simple: the more concentrated your portfolio, the more fragile it becomes. If you don’t take steps to measure and manage that risk, one bad earnings report or regulatory change could undo decades of work.

Want to know if you’re already at risk? You can start with a quick concentration check, then decide whether it’s time to reduce exposure. Click here to get started.

What Is a Single-Security or Concentrated Portfolio?

A single-security portfolio is when one stock or security makes up more than 10–25% of your total investments. A portfolio is considered concentrated when a single stock, bond, or other security accounts for a large share of your holdings.

This lack of diversification means your overall performance is tied to the fate of just one company.

For U.S. investors, this often happens when:

• Your employer grants stock options, restricted stock units (RSUs), or stock purchase plans.
  
  
• You inherit low-basis shares that have appreciated over decades.
  
  
• You hold on to a single company you strongly believe in, letting it grow unchecked inside your portfolio.

Why does this matter? Because when you rely too heavily on one company, you’re exposing your wealth to risks you can’t control. If that company falters, your retirement security, charitable plans, or even your family’s financial stability can suffer.

And with American tax rules making it complex to simply sell, you need thoughtful planning to reduce concentration without creating unnecessary tax bills.

Measuring Concentration Risk

When you’re assessing whether you own too much of one stock, the first step is to measure it. You need a way to quantify what “too much” really means, because what looks fine on paper may actually be putting your entire portfolio at risk.

1.1 Simple Ratios

The easiest method is to look at the percentage of your portfolio that’s tied up in a single stock.

• If one stock is 10% or less of your holdings, you’re in the caution zone. You should still monitor it, but the risk isn’t critical.
  
  
• If the stock climbs to 25%, you’ve entered high-risk territory. A single negative event could wipe out a meaningful portion of your wealth.
  
  
• At 50% or higher, you’re in the danger zone. Your financial health is almost entirely dependent on one company.

Example: If your portfolio is worth $1,000,000 and $300,000 of that is invested in a single stock, you have 30% exposure. That puts you squarely in the “high-risk” range.

1.2 Advanced Metrics

Simple ratios are a start, but professionals often go deeper. Two tools help measure concentration more precisely: the Herfindahl Hirschman Index (HHI) and the Effective Number of Holdings (ENH).

Herfindahl Hirschman Index (HHI)

• Formula: HHI = sum of squared portfolio weights
  
  
• The higher the HHI, the more concentrated the portfolio.
  
  
• Example:
  
  
  • Portfolio = 70% in one stock, 30% in bonds
    
    
  • HHI = 0.70² + 0.30² = 0.49 + 0.09 = 0.58

Effective Number of Holdings (ENH)

• Formula: ENH = 1 ÷ HHI
  
  
• ENH tells you how many holdings your portfolio behaves like.
  
  
• Example:
  
  
  • From the case above, ENH = 1 ÷ 0.58 = 1.7
    
    
  • Even though you technically have two holdings, the portfolio behaves like it has fewer than two — meaning it’s dangerously concentrated.

1.3 Example Table

Here’s how different levels of concentration play out when you apply these formulas:

% in One Stock	HHI	Effective Holdings	Risk Level
30%	0.34	2.9	Warning
50%	0.50	2.0	High
70%	0.58	1.7	Critical
90%	0.82	1.2	Severe

This table shows why a portfolio can look diversified on the surface but still carry hidden risks. A 70% single-stock allocation behaves almost like having just one holding, no matter what else is in the mix.

Curious how concentrated your portfolio really is? We’ll calculate your HHI and Effective Number of Holdings to show you exactly where you stand. Get started here.

Why Concentration Builds Up

If you’re wondering how so much of your wealth ended up in one stock, you’re not alone. For many U.S. investors, concentration isn’t a deliberate strategy, it’s something that builds over time.

Employer Stock and RSUs

One of the most common causes is company stock compensation. Employers often pay part of your bonus in restricted stock units (RSUs) or give you discounted shares through an employee stock purchase plan (ESPP). If you’ve been with your company for years, those shares accumulate quickly. It may feel like a reward for loyalty, but it also means your paycheck and your portfolio are tied to the same company’s fortunes.

Inheritance

Another way concentration creeps in is through inheritance. If you inherit a large block of stock, say 5,000 shares of a blue-chip company you may hold onto it out of sentiment or because selling would trigger capital gains taxes. Over time, that inherited position can become the largest part of your portfolio.

Conviction Investing

Some investors develop strong conviction in a single company. Maybe you bought into a tech stock years ago and it has multiplied tenfold. Instead of trimming the position as it grew, you held on. While that conviction may have rewarded you in the past, it leaves your future vulnerable to one company’s ups and downs.

Tax Aversion

For U.S. investors, taxes are a powerful reason to hold concentrated positions. If your shares have a very low cost basis, selling them could trigger a huge tax bill. This creates what wealth managers call “trapped wealth.” While understandable, this choice increases the risk that one market swing will cost you far more than the taxes you were trying to avoid.

Psychological Anchors

There’s also the human side. You may feel loyalty to your employer, pride in picking a winner, or fear of missing out on future gains. These emotions make it hard to hit the “sell” button, even when the numbers suggest you should.

Takeaway for U.S. Investors: Concentration often builds gradually, but the risks show up all at once. Whether it’s employer stock, inheritance, or conviction investing, recognizing how you got here is the first step in planning how to reduce your exposure.

Tactical Strategies to Manage Concentration

Once you’ve measured your exposure and understood how it built up, the next step is to take action. There isn’t a one-size-fits-all solution. The right path depends on your tax situation, whether you’re an insider, and how quickly you need liquidity. Here are some of the main strategies available to U.S. investors.

Staged Selling

Staged selling is a methodical approach to reducing single stock concentration by selling portions of your position at set intervals. Instead of liquidating everything in one transaction, you create a schedule that spreads sales over months or years. For example, if you hold $1,000,000 worth of one company’s shares, you could sell 10 percent each quarter for two and a half years. This reduces concentration risk step by step while spreading out taxable gains.

Why staged selling matters for U.S. investors

• Selling gradually allows you to keep more control over your tax bracket in each year
  
  
• It helps smooth out market volatility, since you are not exposed to the risk of selling everything on the wrong day
  
  
• You can match sales to your cash flow needs, such as funding retirement withdrawals or meeting annual charitable commitments

Who it fits

• Investors holding single stock concentration that exceeds 25 percent of their total portfolio.
  
  
• Employees with RSUs that vest annually who want to set up a disciplined way to diversify over time.
  
  
• Retirees who are transitioning into income withdrawals and want to free up assets without triggering one large tax bill.

Tax considerations

• By spreading sales across several years, you help reduce the chance of pushing yourself into a higher tax bracket.
  
  
• You can pair each round of gains with tax lot selection from other parts of your portfolio to lower taxable income.
  
  
• Staged selling also gives you flexibility to use charitable planning tools such as donor advised funds (DAFs) or charitable remainder trusts (CRTs). Contributing part of your shares each year allows you to claim deductions while gradually diversifying.

Trade-offs

• You remain exposed to concentration risk during the selling period. If the stock falls 30 percent before you finish, your overall outcome suffers.
  
  
• Selling gradually can create tracking error compared to your target benchmark if you hold off on reallocating proceeds.
  
  
• Emotional discipline is required. Once the plan is set, you need to follow it through even if short-term headlines tempt you to pause.

Numerical illustration

Suppose you own 50,000 shares of one company worth $100 each, for a total of $5,000,000. Your cost basis is $20 per share.

• Selling all at once:
  
  
  • Realized gain = $4,000,000
    
    
  • Federal long-term capital gains tax at 20% = $800,000 (before state taxes)
    
    
• Selling 20 percent per year for five years:
  
  
  • Year 1: $1,000,000 sold, gain $800,000
    
    
  • Year 2: $1,000,000 sold, gain adjusted for new price
    
    
  • And so on until Year 5
    
    
  • If market prices fluctuate, your realized gains and tax owed are spread across multiple returns rather than one large spike

Single Transaction vs. Staged Selling

• One-time sale
  
  
  • Creates a large one-year tax bill because all gains are realized at once
    
    
  • Exposes you to heavy market timing risk since everything depends on the price you sell at that day
    
    
  • Provides immediate liquidity if you need cash right away
    
    
  • Requires little ongoing discipline once executed
    
    
• Staged selling plan
  
  
  • Spreads gains over several years, which helps you manage tax brackets more carefully
    
    
  • Reduces timing risk because sales are averaged across market cycles
    
    
  • Provides liquidity gradually, which works if you only need cash over time
    
    
  • Demands consistency and emotional discipline to stick with the plan

Key takeaway

Staged selling is not about avoiding diversification. It is about creating a disciplined and tax-aware process that helps you reduce a concentrated portfolio risk without destabilizing your overall financial plan. If you own a single-security portfolio, building a structured exit schedule is often the most practical first move before layering in other tactics like collars, exchange funds, or variable prepaid forwards (PVFs).

Rule 10b5-1 Plans (for insiders)

If you’re an executive, director, or insider, you may be restricted by SEC rules that govern when and how you can sell shares. Material non-public information (MNPI) creates a compliance barrier, and blackout periods limit trading windows. A Rule 10b5-1 plan solves this by letting you create a written, pre-arranged schedule with details such as:

• Number of shares to be sold
  
  
• Dates or intervals for the sales
  
  
• Price conditions under which shares will be sold

Once approved, the plan allows trades to happen automatically, even during blackout periods, because the decision to sell was made before you had MNPI.

Who it fits

• Executives and board members subject to frequent trading restrictions
  
  
• Employees with large single stock concentration who routinely face blackout periods and compliance checks
  
  
• Insiders who want to reduce their concentrated portfolio risk but cannot manage sales manually

Tax considerations

• Gains are realized in the same way as with staged selling: short-term or long-term depending on your holding period.
  
  
• By spreading out sales, you may keep taxable income within a lower bracket each year.
  
  
• You can coordinate the timing of plan executions with tax-loss harvesting in other parts of your portfolio.
  
  
• Pairing a 10b5-1 plan with charitable strategies such as donor advised funds (DAFs) can provide tax deductions while reducing concentration over time.

Trade-offs

• Limited flexibility: once the plan is in place, it is legally binding. You cannot pause or alter trades when market conditions shift.
  
  
• Public perception: investors may track your scheduled sales, which can create headlines or signal insider sentiment.
  
  
• Administrative complexity: drafting and maintaining the plan requires coordination with your company’s legal team and compliance officers.

Scenario example

You’re a senior vice president who holds $2,000,000 in company stock, representing 60 percent of your portfolio. Because you frequently have MNPI, you’re blocked from selling during most of the year. With a 10b5-1 plan, you set instructions to sell 5,000 shares on the first trading day of each quarter over the next two years. These sales execute automatically, without the need for your approval each time, and are compliant under SEC rules. This spreads out your concentration risk, creates a steady cash flow, and avoids the appearance of trading on inside knowledge.

Checklist for insiders considering a 10b5-1 plan

• Confirm you qualify as an insider under SEC rules
  
  
• Work with legal counsel to draft the plan with clear terms
  
  
• Define sales by date, amount, and price parameters
  
  
• Coordinate with your financial advisor to align sales with tax planning
  
  
• Monitor progress and adjust only when allowed under SEC regulations

A Rule 10b5-1 plan is a structured path for insiders who want to reduce single stock concentration without running into compliance issues. It doesn’t eliminate the need for broader planning, but it gives you a predictable, legal framework to diversify gradually while maintaining transparency.

Covered Calls

Covered calls are an options strategy where you sell call options against the stock you already own. You agree to sell your shares at a set strike price if the option buyer exercises. In return, you collect an upfront premium. This premium provides income while you continue holding the stock.

Example

Suppose you own 10,000 shares trading at $50 each. You sell call options with a strike price of $55, expiring in three months. You receive $2 per share in premium, or $20,000 total.

• If the stock stays below $55, you keep the premium and the shares.
  
  
• If the stock rises above $55, your shares are called away at $55, and you still keep the $20,000 premium.

Who it fits

• Investors who want to generate cash flow while holding a concentrated portfolio position
  
  
• Shareholders comfortable with selling their stock at a higher price if called away
  
  
• Investors using staged selling but looking for a way to earn income during the process

Tax considerations

• Premiums received from selling calls are taxed as short-term capital gains.
  
  
• If the stock is called away, you may trigger capital gains tax earlier than planned, based on your cost basis.
  
  
• U.S. investors should coordinate option expirations with their tax calendar, especially if they are close to year-end when gains could push them into a higher bracket.
  
  
• Premium income can be offset against losses realized elsewhere through tax-loss harvesting.

Trade-offs

• Your upside is capped. If the stock rallies far above the strike price, you only participate up to the strike plus the premium.
  
  
• Writing calls repeatedly can create a pattern where your shares are sold in strong markets, leaving you to reinvest proceeds at higher valuations.
  
  
• Options require active management. If you don’t monitor expirations, you could be assigned unexpectedly.

When covered calls make sense

• You own a stock you’re already planning to sell but want to earn income while waiting.
  
  
• You expect the stock to trade sideways or rise only slightly in the short term.
  
  
• You want to reduce concentration risk gradually without liquidating your entire position.

Checklist before writing covered calls

• Confirm you hold at least 100 shares per contract (the standard option lot size).
  
  
• Decide on a strike price that balances income with the chance of being called away.
  
  
• Pick an expiration date that matches your liquidity needs.
  
  
• Run the numbers on both outcomes: stock stays flat vs. stock rallies.
  
  
• Review tax impact with your advisor before execution.

Covered calls can be a useful tool to reduce the cost of holding a single stock concentration. They provide income while you maintain ownership, but you’re agreeing to limit upside potential if the stock runs higher. For many investors, this is best used as a complement to staged selling or as part of a broader diversification plan involving exchange funds, protective puts, or variable prepaid forwards (PVFs).

Protective Puts and Collars

Think of a protective put as insurance for your stock. You own shares of a company that represent a large percentage of your portfolio. By buying a put option, you secure the right to sell those shares at a set price. If the stock falls below that price, the put cushions the loss. The cost is the premium you pay upfront.

A collar goes one step further. You buy a put option to limit downside but also sell a call option on the same stock. The income from the call offsets the cost of the put, sometimes reducing the net premium to zero. The trade-off is that you’ve capped your upside potential at the call’s strike price.

Who it fits

• Investors who want to hold onto a single-security portfolio position but want protection if the market turns against them
  
  
• Insiders or long-term holders who cannot or do not want to sell yet but need a hedge against volatility
  
  
• Retirees relying on a concentrated position for income who cannot afford a sharp drawdown

Tax considerations

• The premium you pay for puts is not deductible as an expense; it factors into the overall gain or loss when the position closes
  
  
• Using options may affect your holding period and the classification of capital gains (short-term vs. long-term)
  
  
• If you write calls as part of a collar and the stock is called away, you may trigger a taxable gain earlier than planned
  
  
• For U.S. investors, the IRS has specific rules around constructive sales and option pairing. These rules need to be reviewed with a fiduciary wealth advisor and tax professional

Trade-offs

• Puts require an upfront cash outlay. The protection comes at a cost, and repeated hedging can reduce long-term returns
  
  
• Collars reduce or eliminate the cost of the put but cap your upside. If the stock rallies far above the call strike, you’ll miss out on part of the gain
  
  
• Active monitoring is required. Options expire, and hedges need to be rolled forward if concentration persists

Scenario illustration

You own $2,000,000 of one stock that accounts for 55 percent of your portfolio. You buy a six-month protective put with a strike price 10 percent below the current market value. The cost is $50,000 in premiums.

• If the stock falls 30 percent, your losses stop at about 10 percent because the put gains offset the decline
  
  
• If the stock rises, you still benefit from the upside, minus the $50,000 cost
  
  
• If you set up a collar instead, you might sell calls at 15 percent above the current price and use that premium to fully cover the put cost. The stock is now hedged on the downside but capped on the upside

Insurance analogy

Buying a put is like insuring your house against fire. You pay a premium for protection you hope you never need. A collar is more like agreeing to sell your house at a set price in the future in exchange for the insurance being covered. Either way, you’ve reduced the risk of catastrophic loss, but you’ve given up part of the potential benefit.

Checklist before using protective puts or collars

• Decide how much downside you’re willing to tolerate before protection kicks in
  
  
• Determine whether you want to pay cash for the put or offset the cost by writing a call
  
  
• Choose strike prices and expiration dates that align with your risk tolerance and time horizon
  
  
• Model the impact on after-tax outcomes, especially if shares are called away in a collar
  
  
• Confirm with your advisor that option use does not trigger IRS constructive sale rules in your situation

Protective puts and collars give you structured ways to reduce concentrated portfolio risk while holding on to your shares. They are often paired with other strategies such as staged selling, variable prepaid forwards (PVFs), or exchange funds to create a layered plan. For U.S. investors who need downside protection but cannot or will not sell immediately, these tools act as a practical bridge between holding risk and diversifying gradually.

Variable Prepaid Forwards (PVFs)

A variable prepaid forward (PVF) is a structured agreement with a bank. You pledge a block of your concentrated stock, and in return you receive an upfront cash payment, usually between 70 and 90 percent of the stock’s current value. At the end of the contract, you deliver a set number of shares — or the cash equivalent — based on where the stock trades.

What makes it “variable” is that the exact number of shares you deliver later depends on a preset price range:

• If the stock falls, you deliver more shares.
  
  
• If the stock rises, you deliver fewer shares, which lets you keep some of the upside.

Who it fits

• Founders and long-term executives with large single stock concentration who want liquidity without triggering immediate capital gains
  
  
• Investors with low-basis stock who cannot sell outright because the tax bill would be too high
  
  
• High-net-worth investors who want to monetize concentrated positions for purposes like estate planning, funding a business, or rebalancing into a diversified portfolio

Tax considerations

• When structured properly, a PVF is not treated as an outright sale for tax purposes. That means you defer recognizing gains until the contract matures and the shares are delivered
  
  
• The IRS requires very specific terms: a clear delivery window, collars on price movement, and true risk transfer to the bank
  
  
• If you fail to follow IRS guidelines, the PVF could be reclassified as a sale, triggering immediate taxes
  
  
• You should coordinate PVFs with broader tax planning, such as charitable remainder trusts (CRTs) or exchange funds, to balance liquidity with long-term diversification

Trade-offs

• PVFs are complex contracts. They require negotiation with an investment bank and thorough legal review.
  
  
• They typically involve a large minimum transaction size, which limits access for smaller investors.
  
  
• Because the contract terms are binding, you cannot easily change the structure once in place.
  
  
• Bank counterparties may require collateral, margin agreements, or fees that reduce net proceeds.

Numerical illustration

You own $10,000,000 of one stock that makes up 70 percent of your portfolio. Your cost basis is $1,000,000. Selling outright would create a $9,000,000 gain and a multimillion-dollar tax bill.

Instead, you enter into a PVF:

• The bank pays you $8,000,000 upfront (80 percent of current value).
  
  
• Contract terms require you to deliver between 120,000 and 150,000 shares in three years, depending on stock performance.
  
  
• If the stock falls, you deliver more shares, but you’ve already locked in cash at today’s value.
  
  
• If the stock rises, you deliver fewer shares and retain some upside growth.

Why U.S. investors use PVFs

• Liquidity without an immediate taxable event.
  
  
• Ability to diversify into other assets while keeping exposure to part of the concentrated stock.
  
  
• Flexibility to align payouts with retirement timelines, estate transfers, or charitable giving strategies.

Checklist before entering a PVF

• Confirm your position is large enough to justify a structured agreement with a bank.
  
  
• Review IRS guidelines carefully to ensure deferral treatment holds.
  
  
• Stress-test outcomes for both sharp declines and sharp increases in stock price.
  
  
• Understand collateral requirements and how they affect your liquidity.
  
  
• Align PVF maturity dates with broader portfolio planning, such as trust distributions or retirement withdrawals.

A PVF is one of the most powerful tools for monetizing a concentrated portfolio position without triggering immediate capital gains. It offers upfront cash, partial upside participation, and deferred taxation. But it’s complex and should only be implemented with the help of a fiduciary wealth advisor, tax counsel, and legal support.

Exchange Funds

An exchange fund is a partnership that pools concentrated stock positions from many investors. Each participant contributes shares of a single company, and in return, they receive an interest in the fund. After seven years, you redeem that interest for a basket of diversified securities. Instead of owning one stock, you end up with exposure to dozens of companies.

This strategy doesn’t eliminate your original cost basis. The tax basis of your contributed shares carries over to the new securities, which means taxes are deferred until you sell.

Who it fits

• Investors holding highly appreciated, low-basis stock where an outright sale would trigger a large capital gains tax bill.
  
  
• Shareholders who want diversification but don’t need immediate liquidity.
  
  
• U.S. families using long-term estate planning strategies that benefit from tax deferral.

Tax considerations

• You don’t owe tax when you contribute stock to the exchange fund.
  
  
• Your original cost basis transfers to the new securities you receive at redemption.
  
  
• Taxes are deferred, not eliminated, so you’ll eventually recognize gains when you sell the diversified shares.
  
  
• The IRS has strict rules to ensure that the fund qualifies as an exchange partnership. Contributions of cash are usually limited to a small percentage of the overall pool.

Trade-offs

• Seven-year lock-up: you cannot redeem your fund interest until that period ends.
  
  
• Liquidity is limited. If you need cash before the holding period ends, this may not be the right fit.
  
  
• Minimum contributions are often set at $1 million or more, which makes exchange funds less practical for smaller positions.
  
  
• Portfolio diversification depends on the mix of securities in the fund, so you don’t control the exact holdings you’ll receive.

Scenario illustration

You own $5 million of a single company with a cost basis of $1 million. Selling outright would create a $4 million gain and close to $1 million in federal taxes. Instead, you contribute your shares to an exchange fund. After seven years, you receive a diversified basket of 30 different U.S. equities. You’ve deferred the tax liability while reducing concentration risk and increasing long-term flexibility.

Exchange funds are powerful for investors who want diversification and tax deferral but can tolerate a long lock-up period. They’re often paired with other strategies, such as donor advised funds (DAFs) for philanthropy or variable prepaid forwards (PVFs) for liquidity. If you hold highly appreciated shares and don’t need immediate access to cash, an exchange fund can transform a concentrated portfolio position into broader market exposure while postponing taxes.

Charitable Pathways

When you hold a large block of appreciated stock, charitable planning can be an effective way to reduce concentration risk, minimize taxes, and support causes you care about. Two of the most common tools are donor-advised funds (DAFs) and charitable remainder trusts (CRTs).

Donor-Advised Funds (DAFs)

• How it works: You contribute appreciated stock directly to a donor-advised fund. The shares are sold inside the fund without triggering capital gains, and you receive a charitable deduction based on fair market value. You can then recommend grants to charities over time.
  
  
• Who it fits: Investors who want to reduce single stock concentration, claim an immediate tax deduction, and spread charitable giving over several years.
  
  
• Scenario: You donate $500,000 of low-basis stock to a DAF. If sold outright, the gain would have created $100,000 or more in taxes. By donating instead, you avoid realizing the gain, claim a deduction, and the full $500,000 is available for grants.

Charitable Remainder Trusts (CRTs)

• How it works: You place appreciated stock into a trust. The trust sells the stock without immediate capital gains tax and reinvests the proceeds in a diversified portfolio. You receive income for life (or a set term), and the remainder goes to charity after the trust ends.
  
  
• Who it fits: Investors who want to convert a concentrated portfolio into a steady income stream while also supporting philanthropy.
  
  
• Scenario: You contribute $2 million of stock with a $300,000 basis into a CRT. The trust sells the shares tax-free and reinvests. You receive annual payments of 5 percent, or $100,000 per year, and your estate gets a charitable deduction. After your passing, the remainder passes to the charity you designated.
  
  

Tax considerations

• DAFs: You receive an immediate deduction, avoid capital gains, and retain flexibility over how and when grants are made.
  
  
• CRTs: You receive a partial deduction upfront, defer capital gains inside the trust, and receive taxable income distributions annually.
  
  
• Both strategies reduce your taxable estate if structured properly.

Trade-offs

• You give up control of the donated shares. In the case of CRTs, the remainder must go to charity.
  
  
• These structures are most effective if you already have charitable intentions, since part of your wealth is directed away from heirs.
  
  
• CRTs require legal setup, annual administration, and compliance with IRS rules.

Checklist for charitable concentration strategies

• Identify the shares you want to donate, usually those with the lowest basis
  
  
• Decide between immediate giving flexibility (DAF) or income plus long-term giving (CRT)
  
  
• Model the tax deduction, estate impact, and income stream before committing
  
  
• Coordinate with your advisor and tax professional to align with broader estate and retirement plans

Charitable pathways allow you to reduce concentrated portfolio risk while advancing causes you value. A DAF can help you claim deductions now and grant later, while a CRT provides lifetime income and long-term charitable impact. Both tools can be combined with other strategies like staged selling or exchange funds to create a well-rounded diversification plan.

Retirement Accounts and Employer Plans

Many U.S. employees accumulate company stock inside their retirement accounts, often through 401(k) plans. This creates concentration risk because both your retirement savings and your career are tied to the same company. U.S. tax law offers a special provision called Net Unrealized Appreciation (NUA), which can make exiting this concentrated position more efficient.

When you distribute employer stock from a 401(k) at retirement or separation of service:

• The cost basis of the shares is taxed as ordinary income at distribution.
  
  
• The appreciation above that cost basis is taxed later as long-term capital gains when you sell the stock.

This split treatment can significantly reduce lifetime taxes if used correctly.

Who it fits

• Retirees or employees leaving a company with a large block of employer stock in their 401(k).
  
  
• Investors with low-basis employer shares where a standard rollover into an IRA would convert all gains into future ordinary income.
  
  
• Households with other sources of income who want to manage their tax brackets in retirement.

Tax considerations

• NUA can reduce taxes because long-term capital gains rates are often lower than ordinary income tax rates.
  
  
• You must distribute the shares directly from the 401(k) to a taxable account to qualify for NUA treatment. Rolling the stock into an IRA first removes the NUA option.
  
  
• State taxes also apply, and treatment varies depending on where you retire.
  
  
• Once executed, the choice is irreversible, so it requires careful planning with both a fiduciary wealth advisor and a CPA.

Trade-offs

• Complex rules: you must meet specific IRS requirements, including taking the entire 401(k) balance in a single distribution year.
  
  
• Immediate tax bill: the cost basis is taxable as ordinary income right away, which could push you into a higher bracket if not managed carefully.
  
  
• Irreversible decision: once you elect NUA and move shares to a taxable account, you cannot change your mind later.

Numerical illustration

Suppose you hold $1,000,000 of company stock in your 401(k). Your cost basis is $200,000.

• If you roll the account into an IRA, all $1,000,000 will eventually be taxed as ordinary income when withdrawn.
  
  
• If you elect NUA treatment, you pay ordinary income tax only on the $200,000 cost basis now. The $800,000 of appreciation is taxed later at long-term capital gains rates, potentially 15 or 20 percent, instead of your ordinary rate which could be 32 percent or higher.

When NUA makes sense

• You expect to be in a high ordinary income tax bracket during retirement.
  
  
• Your employer stock has appreciated significantly, and the cost basis is very low compared to current value.
  
  
• You want flexibility to sell shares gradually in a taxable account rather than being locked into IRA withdrawal rules.

Checklist before considering NUA

• Confirm your cost basis with plan records.
  
  
• Run projections comparing lifetime taxes under an IRA rollover vs. NUA.
  
  
• Evaluate whether taking the entire distribution in one tax year will create unintended bracket jumps.
  
  
• Coordinate with your CPA and advisor to balance NUA with other retirement income sources like Social Security, pensions, or annuities.
  
  
• Plan for liquidity to pay the tax due on the cost basis at distribution.

For retirees holding concentrated employer stock in a 401(k), NUA can be a powerful way to reduce long-term taxes while diversifying. It transforms part of your future withdrawals from ordinary income into long-term capital gains, giving you more flexibility and control over how you exit concentrated positions. Because the decision is permanent, it should be modeled carefully as part of your retirement income plan.

Consulting with a Fiduciary Wealth Advisor

A fiduciary wealth advisor has a legal obligation to act in your best interest. For investors with a concentrated portfolio position, that means analyzing your exposure, running tax projections, and helping you choose strategies that balance diversification, cash flow, and estate planning. Unlike a general financial planner, a fiduciary must place your interests first.

When you sit down with an advisor, the process typically includes:

• Reviewing your current portfolio to measure single-stock concentration through HHI and effective number of holdings.
  
  
• Mapping tax liabilities tied to low-basis shares.
  
  
• Stress-testing scenarios: “What if this stock drops 30 percent? How would that affect your retirement plan?”
  
  
• Designing a combination of tactics, such as staged selling, collars, exchange funds, or charitable vehicles, depending on your needs.

Case example

You hold $3 million of employer stock with a cost basis of $500,000, which makes up half of your net worth. On your own, selling outright could trigger $2.5 million of gains and close to $600,000 in taxes.

A fiduciary advisor builds a layered plan:

• A 10b5-1 plan to sell shares gradually within compliance windows.
  
  
• A collar to hedge part of the risk while waiting for those sales.
  
  
• A donor advised fund to donate $200,000 of low-basis shares, generating a deduction to offset gains.
  
  
• Modeling of NUA for employer shares inside your 401(k).
  
  

This integrated approach reduces your exposure, defers part of the tax burden, and incorporates philanthropy.

Checklist for working with a fiduciary advisor

• Confirm the advisor operates under a fiduciary standard.
  
  
• Prepare tax records, cost basis data, and estate documents before your meeting.
  
  
• Ask for stress-test models showing how your portfolio behaves in different market conditions.
  
  
• Review how each strategy affects both your short-term liquidity and long-term estate plan.
  
  
• Schedule periodic reviews since concentration can creep back if one stock continues to grow.

A fiduciary wealth advisor acts as the architect of your concentration risk management plan. They bring together tax planning, estate structuring, and portfolio strategy into one coordinated approach. For U.S. investors holding large positions in employer stock or inherited shares, this type of guidance can prevent costly mistakes and create a smoother path toward diversification.

Strategy Comparison Grid

When you’re deciding how to handle a concentrated portfolio, it helps to see all the options side by side. The grid below compares each strategy by showing whether it reduces risk, preserves upside, the tax treatment involved, the liquidity timeline, and the type of investor it usually fits. This quick reference is meant to complement the detailed explanations above so you can match your situation to the right approach.

Strategy	Reduces Risk?	Keeps Upside?	Tax Impact	Liquidity Timeline	Complexity	Who It Fits
Staged Selling	Yes	No	Realizes gains gradually	Short to medium	Low	Most investors
10b5-1 Plan	Yes	No	Gains taxed on sale	Medium to long	Medium	Insiders
Covered Calls	Moderate	Limited	Premium taxed + possible gains	Short	Medium	Income seekers
Protective Put	Yes	Yes	Premium cost	Short	Medium	Risk-averse
Collar	Yes	Limited	Taxable if exercised	Short to medium	Medium	Balanced
PVF	Yes	Partial	Gains deferred	Medium to long	High	Founders/HNW
Exchange Fund	Yes	Yes	Gains deferred	7+ years	High	Low-basis holders
DAF / CRT	Yes	No (to donor)	Deduction + defer gains	Immediate income / deferred	High	Philanthropic investors
NUA	Yes	Yes	Split tax treatment	Retirement	Medium	401(k) holders
Fiduciary Advisor	Yes	Yes (via planning)	Depends on chosen tactics	Ongoing	Medium	Broad investors

“Not sure which strategy is right for you? Schedule a fiduciary portfolio review and we’ll help design a plan tailored to your situation.”

Putting It All Together – A Step-by-Step Framework

Knowing the risks and the tools is important, but the real value comes from putting it all together. Here’s a practical framework you can use to evaluate and manage concentration risk in your portfolio.

Step 1: Measure Your Exposure

Start with the basics: calculate what percentage of your portfolio is tied to one stock. If you want more precision, use the HHI and Effective Number of Holdings formulas. This gives you a true picture of how diversified (or not) your portfolio really is.

Step 2: Classify Your Risk Level

Once you’ve measured, slot your portfolio into a risk category:

• Low risk (under 10%): Monitor regularly.
  
  
• Warning (10–25%): Begin planning to trim or hedge.
  
  
• High (25–50%): Consider active strategies such as staged selling, hedging with options, or structured solutions.
  
  
• Critical (50%+): Immediate action is needed. Combine multiple tactics to reduce exposure and protect against downside.

Step 3: Identify Your Constraints

Before you choose a strategy, consider what’s specific about your situation:

• Taxes: Are you sitting on large unrealized gains with a low cost basis?
  
  
• Insider rules: Are you subject to blackout periods or insider trading restrictions?
  
  
• Liquidity needs: Do you need cash in the short term, or can you wait?
  
  
• Philanthropic goals: Do you want to incorporate charitable giving?
  
  
• Retirement accounts: Do you hold employer stock inside a 401(k) or IRA?

Step 4: Match Strategies to Your Situation

Now that you know your constraints, match them to the appropriate strategy:

• Low-basis stock with tax concerns → exchange funds, PVFs, or charitable vehicles like DAFs.
  
  
• Insider with blackout windows → 10b5-1 plan or PVF.
  
  
• Retirement account holdings → explore NUA treatment.
  
  
• Need short-term liquidity → staged selling or options-based strategies.
  
  
• Desire to reduce risk but keep upside → protective puts or collars.
  
  
• Uncertain or complex situation → consult with a fiduciary advisor who can layer strategies together.

Step 5: Execute and Monitor

Once you’ve chosen a path, execution matters. Document your plan, track progress, and review regularly. If your concentrated stock keeps growing, revisit your strategy before it once again dominates your portfolio.

Decision Tree Table

Concentration risk is not one-size-fits-all. The right approach depends on how much of your wealth is tied to a single stock. The decision tree below shows typical thresholds, the actions that make sense at each level, examples of strategies that apply, and which types of investors those steps usually fit. Use this as a quick guide to understand whether you should monitor, trim, or take immediate action.

Concentration Level	Next Step	Example Strategy	Who It Fits
Under 10%	Monitor exposure	Regular rebalancing	Most investors
10–25%	Plan trimming	Staged selling, covered calls	Broad investors
25–50%	Reduce actively	Protective puts, collars, 10b5-1 plan	Insiders, growth holders
50%+	Urgent action	Exchange funds, PVF, CRT, fiduciary advisor	Founders, retirees, inheritance holders

Key Point: This framework is about taking measured, proactive steps. Concentration doesn’t fix itself, you need to act before the market makes the decision for you.

Not sure how to apply this framework to your situation? A fiduciary advisor can help you build a plan that balances taxes, liquidity, and long-term goals. Contact us today to get started.

Special Situations Across Investor Types

Concentration risk doesn’t look the same for everyone. The way you address it depends not only on how much of one stock you own, but also on where it’s held and what stage of life you’re in. Here are some of the most common situations U.S. investors face.

Employees with RSUs or ESPPs

• How it happens: Over time, restricted stock units (RSUs) and employee stock purchase plans (ESPPs) accumulate. You may also reinvest dividends, which compounds the exposure.
  
  
• Why it matters: Your paycheck and your portfolio are both tied to your employer. If the company struggles, you could lose both income and wealth at the same time.
  
  
• Possible strategies: Staged selling after vesting, using covered calls to generate income, or setting up a 10b5-1 plan if you’re an insider.

Retirees with Employer Stock in 401(k)s

• How it happens: Many retirees have a significant amount of employer stock sitting in their 401(k).
  
  
• Why it matters: Retirees are often more dependent on their portfolios for income, so a downturn in one company can directly affect their lifestyle.
  
  
• Possible strategies: Explore Net Unrealized Appreciation (NUA) rules, which allow you to pay ordinary income tax only on the cost basis and capital gains tax on the growth. This can save on taxes over your lifetime. Pair NUA with staged selling or charitable gifting for added flexibility.

Founders and Insiders

• How it happens: Founders, executives, or board members may hold massive blocks of company stock from the early days. SEC restrictions and blackout windows make selling complex.
  
  
• Why it matters: Your wealth may be tied to both company performance and regulatory limits. The stakes are high, and liquidity may be locked behind compliance barriers.
  
  
• Possible strategies: Rule 10b5-1 plans, variable prepaid forwards (PVFs) for liquidity with deferred taxes, or collars for downside protection. In some cases, exchange funds can diversify part of the position.

Everyday Investors

• How it happens: You bought a stock years ago that performed well, and you never trimmed it. Or you inherited shares and held onto them to avoid capital gains tax.
  
  
• Why it matters: Even without insider restrictions or employer ties, concentration exposes you to risks you may not realize until it’s too late.
  
  
• Possible strategies: Staged selling, exchange funds for low-basis shares, or charitable giving through a donor-advised fund (DAF) if you want both tax efficiency and philanthropy.

Key Point: No matter which group you fall into, the underlying problem is the same — too much reliance on a single company. The solutions vary, but the goal is identical: protect your wealth, keep more of what you’ve earned, and free your future from unnecessary risk.

Your situation is particular to you. Whether you’re holding RSUs, managing retirement stock, or sitting on an inheritance, we can help design a plan that fits. Schedule a consultation today.

Why Doing Nothing Is Risky

It’s tempting to let things ride when a stock is performing well. You may think, “Why sell now when it keeps going up?” or “I’ll deal with it later.” The truth is, doing nothing is often the riskiest choice of all.

Sudden Wealth Destruction

Portfolios that are heavily concentrated can collapse quickly if the company behind the stock faces a scandal, regulatory change, or a sudden drop in earnings. In these cases, employees and long-term investors often lose not only portfolio value but also income and retirement security.

The Illusion of Paper Wealth

When your net worth is tied to one stock, it may look impressive on paper. But that wealth is fragile. Until you diversify, you haven’t locked in the value. A sudden market downturn can turn a seven-figure position into a fraction of its worth before you have time to react.

Emotional Anchors Keep You Stuck

Loyalty, pride, or the fear of paying taxes often stop investors from acting. These emotions feel justified, but they expose you to risks you cannot control. Even the strongest companies can face setbacks that no one predicts.

Reframing Diversification

Diversification isn’t about giving up on a company you believe in. It’s about protecting what you’ve built. When you spread risk across different assets, you free your future from being dependent on a single company’s performance. For U.S. investors, diversification also means using tax-aware strategies to exit intelligently, rather than waiting until the market forces your hand.

FAQ

What is concentration risk in a portfolio?

Concentration risk happens when a single stock, bond, or security makes up a large share of your total portfolio. This ties your wealth to the performance of one company, which increases the chance of large losses.

How do you calculate HHI for a portfolio?

The Herfindahl Hirschman Index (HHI) is the sum of squared portfolio weights. For example, if one stock is 70% of your portfolio and the rest is 30% in bonds, the HHI would be 0.70² + 0.30² = 0.58. The closer the HHI is to 1, the more concentrated the portfolio.

At what percentage does one stock become too risky?

Financial professionals often flag 10% as a warning, 25% as high risk, and 50% or more as critical. Beyond those levels, your portfolio is too dependent on one company’s performance.

What is an exchange fund and how does it work?

An exchange fund allows you to contribute your concentrated stock into a pool with other investors. After a holding period (typically seven years), you receive a diversified basket of securities. Taxes are deferred because you haven’t sold the original shares.

What is Net Unrealized Appreciation (NUA) in a 401(k)?

NUA is a special U.S. tax rule that applies when you hold employer stock in a 401(k). At distribution, you pay ordinary income tax on the cost basis and long-term capital gains tax on the appreciation, which can lower lifetime taxes.

How does a 10b5-1 plan help insiders?

A 10b5-1 plan lets insiders pre-arrange stock sales according to a set schedule. This helps them diversify while staying compliant with SEC rules and avoiding accusations of trading on insider information.

Why should you consult with a fiduciary advisor?

A fiduciary advisor is legally required to act in your best interest. They can run tax simulations, model risk exposure, and design a plan that balances diversification, liquidity, and estate planning.

Wrapping up

When too much of your wealth is tied to one stock, your financial security depends on something you cannot control. Concentration risk builds quietly but can cause damage quickly. The good news is that you have options. Whether it’s staged selling, tax-aware strategies like exchange funds or NUA, or advanced solutions such as collars and variable prepaid forwards, there’s a way to reduce your exposure without giving up your long-term goals.

The smartest move you can make is to take action before the market forces you to. With the right plan, you can protect what you’ve earned, lower your risks, and position your portfolio for sustainable growth.