One type of risk to an otherwise-diversified investment portfolio is a concentrated stock position (CSP). In brief, a concentrated stock position is any large accumulation of stock in one company relative to the investor’s total wealth. Longtime employees, executives, and early investors may end up with a significant percentage of their total investable assets “locked-up” in the one stock, putting them in a concentrated stock position. Any time a large portion of an investor’s capital is tied up in one stock, it presents risks to their investment strategy, namely through diversification risk, tax consequences, and liquidity. We help investors with concentrated stock positions intelligently manage the associated risks with the goal of smoothing out the large position into a well-diversified portfolio.

While there is no widely-accepted definition of a concentrated position, at Chicago Partners, we define a concentrated stock position as any investment in one stock that represents 15%, or more, of the investor’s total investable assets.

For example, someone who invested in Apple way back in 2000 may have purchased 10,000 shares at a split-adjusted price of $1. Through Apple’s success and subsequent capital appreciation, this savvy investor’s Apple position is worth about $1.3 million today. For the average investor, it is very likely this Apple position represents more than 15% of their total investable assets concentrated in one position.

While exceptional capital growth over the long term is one way an investor can end up with a concentrated stock position, we normally see two more common scenarios that generate a CSP for an investor.

One common incentive for management to focus on the long-term growth of a company is to include common stock in the manager’s total compensation package. While an excellent opportunity to grow their own wealth while growing the business, left unattended, the stock position can become a threat to their overall investment portfolio after their job is done.

For example, Gamestop CEO George Sherman held about 2.3 million shares of Gamestop, which were awarded to him as part of his executive compensation. On January 29, he was faced with a significant concentrated stock position as the value of his shares launched to over $900 million. Had Gamestop held this interplanetary price, Sherman would certainly have held a concentrated stock position, as well as the risks that come with it.

The idea behind a diversified portfolio is to create a “hedge” against losses in any one specific company. A portfolio with assets spread across many investments is less affected by any one of those investments’ moves.

On the flip side, a concentrated or undiversified position has an increased sensitivity to sudden changes in the company itself (company risk), the sector in which the company conducts business (sector risk), and overall market volatility (market risk).

• Changes in the company can be anything from routine changes in management to unforeseen scandals.


• In a sector, regulation and changing perceptions of consumer trust can shake an industry as a whole. For CSP holders in Uber or Lyft, there is still the underlying sector-wide threat of a reclassification of employees.


• While market risk is nearly always present in investments to some degree, diversification out of a concentrated stock position can proactively position an investor to stay relatively more protected in the event of a larger-scale downturn.

For the concentrated investment, the majority of shares have likely passed the one-year mark to move from short-term capital gains to long-term capital gains. While the long-term capital gains tax is currently lower than the short-term capital gains tax, it still can significantly affect an investor’s annual income in ways the investor may not appreciate.

If the investor has accumulated significant capital gains on their concentrated position, and they choose to realize the gains on their position, they may be forced to deal with the increased tax bill.

With the significant accumulated capital gains in their position, an investor may be reluctant to sell any of their concentrated stock. Again, we see the looming tax consequences of selling out of their position, which, if the position represents a large portion of their assets, may leave the investor feeling stuck.

We cover some strategies that may help mitigate the risk of capital gains taxes on concentrated positions below.

The recent underperformance of the value style has also motivated investors to find ways to predict and avoid disappointing performance by timing their allocation to value vs. growth stocks. Substantial research has been conducted on various market timing strategies. These strategies try to forecast bull and bear market conditions for the broad equity market and specific styles.

Dimensional back tested 680 strategies to identify ones that outperform a buy and hold strategy.[3] As illustrated by the excess returns for all 680 strategies in Exhibit 2, underperformance was by far the most

likely outcome for these approaches to timing premiums. The small number of successful outcomes on the far right often turnout attractive at first glance, but not robust to further testing.

For investors with a large stock position in their taxable investment account, tax-loss harvesting is one simple method that uses realized losses to offset realized gains. In order to tax-loss harvest correctly, an investor must stay out of the position sold for 30 days. You can find our in-depth walkthrough of tax-loss harvesting by clicking here.

Not to be confused with Exchange-Traded Funds (ETFs), an Exchange Fund allows an investor to “trade-in” some of their concentrated stock for a share in the larger Exchange Fund. This trade allows an investor to diversify out of their position while, at the same time, avoiding the realization of capital gains that would affect their taxable income.

The idea behind an Exchange Fund is that many investors have concentrated stock positions they would like to diversify. A bank or other larger financial institution may create an Exchange Fund based on the characteristics of the securities. A small-cap Exchange Fund may be a good fit for an investor whose concentrated position lies in a small-cap company.

Once enough shares are contributed to the fund, the fund closes, and investors receive shares of the fund itself, which is diversified by many investors’ contribution of their own concentrated stock.

Direct indexing, the practice of replicating an index inside an investor’s portfolio, purchases stock in a direct proportion to an index. Because a direct index is made up of stocks, an investor can use tax-loss harvesting to offset some of the capital gains from the sale of their concentrated stock. Along with tax-loss harvesting, the direct index is typically well-diversified, and reduces the diversification risk of the concentrated position.

Investors in some companies may have stock considered to be a Qualified Small Business Stock (QSBS). QSBS comes with its own array of benefits to the investor, which can help reduce or eliminate the capital gains tax on the stock when it is sold.

A few requirements are necessary for a stock to be considered a QSBS. The company must be a C-Corporation, and must have issued its stock after August 10, 1993. The investor must purchase the stock directly from the company, and the total tax basis of the investment must be less than $50 million.

Investors with QSBS may qualify for 10x their original cost basis (the original investment amount in dollars) or $10 million of exemption per taxpayer.

Another option to help reduce a CSP and minimize its tax burden is to take advantage of a Donor Advised Fund (DAF). In this scenario, the client will donate a portion of the concentrated shares into a Donor Advised Fund that they set up and maintain direct control over. The client will receive a tax deduction for a charitable contribution for the fair market value of the shares donated to the DAF.

The donation helps offset the tax burden generated from other shares of the CSP that are sold outside of the DAF. The client then uses the proceeds from the shares sold to diversify their investments, and can use the DAF to provide grants to charities that they want to support at the timing that works for them.

For more information on how to build an investment strategy around a concentrated stock position, please reach out to one of our advisors.