If a large share of your net worth is tied up in one company’s stock, through equity compensation, a 401(k) heavy in employer shares, or years of holding onto vested grants, you’re carrying concentration risk, even if your portfolio looks diversified on paper.
This is one of the most common, and most overlooked, risks we see among corporate executives. It builds gradually: a grant here, a vesting event there, a decision to “let it ride” because the stock has done well. Years later, an executive can look up and realize a single company, often the one that also pays their salary, represents the majority of their financial life.
The risk isn’t hypothetical. Concentrated positions can suffer sudden, significant declines for reasons that have nothing to do with the broader market: a product failure, a leadership change, an industry disruption. When your income and your investment portfolio are tied to the same source, that risk compounds instead of diversifying away.
We’ve also seen concentration risk compound during major life transitions, such as a divorce, a home purchase, or funding a child’s education, when a large stock position looks like a convenient source of liquidity precisely because it’s already there. Using a concentrated position this way, without a coordinated tax and cash-flow plan, often means selling at an inopportune time from a tax perspective, on top of increasing exposure to a single company at a moment when other parts of life already feel less stable.
The tax challenge is what usually keeps people from addressing it. Selling a large, low-basis position can trigger a substantial capital gains tax bill, which understandably makes executives hesitant to act. But there are more tools available than “sell everything” or “do nothing”; staged diversification over multiple tax years, exchange funds, charitable strategies for highly appreciated stock, and hedging techniques can reduce downside exposure while a longer-term diversification plan plays out.
The right approach depends on your specific tax situation, your restrictions as an insider or affiliate, and your broader financial goals, which is exactly why this isn’t a decision to make in isolation from your tax and estate planning.
Concentration risk rarely announces itself until it’s already a problem. If a meaningful share of your net worth depends on one company’s stock, it’s worth a deliberate conversation about how much of that risk you want to be carrying, and a plan for reducing it on your terms, not the market’s.
If you have any questions on concentrated risk, please feel free to contact us here.