A concentrated stock position often develops for a good reason. An executive may accumulate company stock through RSUs or stock options, a business owner may retain shares after a transaction, or a long-term investor may simply own a company whose stock appreciated dramatically.

The result can be substantial wealth—but also substantial risk.

Selling the position may trigger a significant capital gain. Holding too much of one company can expose an investor to unnecessary portfolio risk. The challenge is finding the appropriate balance between diversification and tax efficiency.

At Di Bello Financial, we approach concentrated stock management as both an investment-management and tax-planning decision. The objective is to reduce excessive concentration while considering taxes, retirement needs, charitable goals, estate planning, and the investor's broader financial picture.

There is no single percentage that defines concentration for every investor.

A position becomes concentrated when one security represents enough of an investor's portfolio or net worth that a significant decline could materially affect long-term financial security.

For corporate executives, the risk can be even greater because salary, bonuses, stock compensation, retirement benefits, and investments may all depend upon the same company.

This creates a fundamental planning question:

How much company-specific risk should you continue accepting simply to defer capital gains taxes?

A highly appreciated stock with a low-cost basis can produce a substantial taxable gain when sold.

Federal capital gains taxes, the Net Investment Income Tax when applicable, and state income taxes may all need to be considered. California residents face an additional consideration because California does not provide a preferential tax rate for long-term capital gains.

But taxes should not become the sole reason for retaining an inappropriate investment.

The goal isn't necessarily to avoid tax. It is to determine how to reduce concentration risk while managing the resulting taxes intelligently.

Before selling, we first determine how much exposure to the company is reasonable given the client's complete financial situation.

A client with substantial diversified assets outside the position may reasonably retain more of the stock than a retiree whose concentrated holding represents a large portion of available retirement assets.

The objective also does not necessarily need to be eliminating the position entirely. A successful company may remain an appropriate investment. The issue is whether its weighting creates excessive risk.

When circumstances permit, diversification can sometimes occur over several tax years rather than through one large transaction.

The timing of sales can be coordinated with changes in taxable income, available capital losses, retirement, charitable contributions, Roth conversions, business transitions, or other significant financial events.

A staged approach can potentially reduce tax pressure while steadily reducing company-specific exposure.

However, diversification should not be delayed simply for tax reasons when the position represents an unacceptable level of risk.

Capital losses elsewhere in a portfolio may potentially offset gains generated by selling appreciated stock.

This is one reason we monitor tax-loss harvesting opportunities throughout the year rather than treating them solely as a year-end exercise.

Periods of market volatility can sometimes create opportunities to harvest losses in other investments while simultaneously reducing an appreciated concentrated position.

There may also be years when intentionally realizing gains makes sense—for example, following retirement or during another temporarily lower-income period.

Investment and tax decisions should therefore be evaluated together.

For charitably inclined investors, appreciated stock can be an especially useful planning asset.

Rather than selling shares, paying capital gains tax, and then donating cash, an investor may be able to contribute appreciated securities directly to a qualified charity or donor-advised fund.

Depending upon the circumstances and applicable tax rules, this may reduce the concentrated position, avoid realization of the embedded capital gain, and potentially generate a charitable deduction.

Charitable giving can therefore become an important component of a broader diversification strategy.

Executives can face a unique problem: while trying to diversify existing company stock, they continue receiving additional shares through RSUs, stock options, or employee stock plans.

Without a strategy for new awards, concentration may continue increasing.

For example, an executive might systematically sell newly vested RSUs while gradually reducing older appreciated shares. Stock-option exercises can also be coordinated with taxable income, capital gains, and retirement planning.

The objective is to prevent future compensation from continually rebuilding the risk the investor is trying to reduce.

Selling a concentrated stock is only part of the process. The proceeds need to be reinvested appropriately.

At Di Bello Financial, proceeds can be incorporated into a diversified portfolio of individual stocks, low-cost ETFs, individual bonds, Treasuries, municipal bonds, REITs, and other investments appropriate for the client's circumstances.

The goal is not simply to own more securities. It is to create a portfolio with a more appropriate balance between expected return, risk, income needs, taxes, and long-term financial objectives.

Estate planning can materially affect decisions involving highly appreciated securities.

Under current federal tax law, certain inherited assets may receive an adjustment in cost basis at death. Consequently, selling, gifting, donating, or retaining appreciated stock can have very different long-term consequences.

The appropriate strategy depends upon the investor's age, income needs, estate size, charitable intentions, family objectives, and current tax law.

For this reason, concentrated stock planning should be coordinated with the client's estate and tax professionals when appropriate.

One of the most common reasons investors retain excessive concentrations is simple:

"I don't want to sell because I'll owe too much tax."

The concern is understandable, but the embedded gain usually exists because the investment was successful.

If a $1 million gain generates a tax liability, paying that tax can feel painful. But if avoiding the tax leaves several million dollars exposed to one company, the potential investment loss may be substantially greater.

Tax efficiency matters. So does preserving the wealth that has already been created.

Consider an investor with a $5 million investment portfolio, including $2 million of one highly appreciated company stock.

That single investment represents 40% of the portfolio.

Rather than viewing the decision as either "sell everything" or "sell nothing," a coordinated strategy could combine gradual sales, available capital losses, charitable gifts of appreciated shares, management of future stock compensation, and diversified reinvestment of the proceeds.

Over time, the investor can potentially reduce company-specific risk without unnecessarily realizing the entire embedded gain in a single tax year.

The appropriate strategy will always depend upon the investor's individual circumstances.

Sometimes tax efficiency needs to take a secondary role.

If one stock represents an excessive percentage of an investor's liquid wealth, the company's fundamentals have deteriorated, retirement is approaching, or the portfolio will soon be needed to generate income, reducing exposure more quickly may be appropriate despite the resulting tax liability.

Paying tax can sometimes be the cost of eliminating an unacceptable financial risk.

Concentrated stock planning is ultimately about balancing two competing considerations:

the investment risk of continuing to hold the stock and the tax cost of selling it.

At Di Bello Financial, we coordinate portfolio management, tax strategy, executive compensation, retirement planning, charitable planning, and estate planning considerations to develop an appropriate diversification strategy.

A concentrated position should have an intentional plan—how much should ultimately be retained, how quickly diversification should occur, when gains should be realized, how proceeds should be reinvested, and how the strategy fits into the client's broader financial life.

The objective is straightforward:

Preserve the wealth the investment helped create without allowing one stock to put too much of that wealth at risk.

Annette Di Bello, CPA/PFS, CFP® is the Founder and President of Di Bello Financial, a fee-only Registered Investment Advisor headquartered in Mission Viejo, California.

With nearly four decades of experience in accounting, taxation, financial planning, and investment management, Annette specializes in helping high-net-worth individuals and families, business owners, executives, physicians, and retirees coordinate investment decisions with tax strategy and long-term financial planning.

As both a Certified Public Accountant (CPA) with the Personal Financial Specialist (PFS) credential and a CERTIFIED FINANCIAL PLANNER® professional, Annette brings an integrated perspective to portfolio management, executive compensation, retirement planning, tax strategy, estate planning coordination, and wealth preservation.

Di Bello Financial serves clients throughout Orange County, Los Angeles County, San Diego County, and other states where permitted by law.

This article is provided for informational and educational purposes only and should not be construed as individualized investment, tax, accounting, or legal advice. Examples and strategies are illustrative and may not be appropriate for every investor. Tax laws and regulations are subject to change. Readers should consult their own qualified professional advisors regarding their individual circumstances.

Investment advisory services are offered through Di Bello Financial, a California Registered Investment Advisor. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal.

Tax information is general in nature and is not intended as tax advice. Consult your tax professional regarding your individual circumstances.

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