5 Strategies to Diversify a Concentrated Stock Position

A concentrated stock position exists when a single stock makes up a disproportionately large share of total investable assets. Generally, this is defined as more than 10-15% of the portfolio. But many high-net-worth investors exceed that threshold by a wide margin, sometimes holding 30%, 50% or even more in one company. Often, this is due to executive compensation, founder equity, inherited stock or a long-held successful investment. But given that diversification typically triggers capital gains taxes, the challenge becomes balancing tax efficiency against the financial and psychological cost of remaining concentrated. 

Working with a financial advisor can help you have a better understanding of what stock positions your individual portfolio needs.

Why a Concentrated Position Creates Risk

A concentrated position ties portfolio outcomes to the performance, management decisions, regulatory environment and market sentiment surrounding a single company. Individual stocks historically experience deeper and more frequent drawdowns than diversified indexes. Additionally, research has shown that the majority of individual stocks underperform broad indexes over long time horizons. ¹

The risk is amplified by sequence of returns exposure. A sharp decline near a liquidity need, retirement or major purchase is much harder to recover from than a comparable drawdown in a diversified portfolio. Company insiders face additional exposure because their compensation, human capital and investment portfolio are all tied to the same company.

Several psychological barriers often delay action. This can include the tax cost of selling appreciated shares, emotional attachment to a founder’s or family’s company, fear of missing future gains and trading restrictions for executives. But it is important to remember that diversification is not about pessimism toward the underlying company. Instead, it’s about resilience across a portfolio that has to support real financial goals.

How to Diversify From a Concentrated Stock Position

For portfolios overly concentrated in any one area, there are a number of potential fixes that can lead to a more diversified, balanced portfolio.

Strategy 1: Gradual, Systematic Selling

The most direct approach is selling the position in stages over multiple tax years rather than all at once. Spreading sales across years can keep the investor in a lower capital gains bracket each year. Further, it’s possible to time sales around losses elsewhere in the portfolio for tax-loss harvesting offsets. Years with otherwise lower income provide opportunities for larger sales at lower marginal rates.

It is also a path around trading restrictions. For company insiders, a Rule 10b5-1 trading plan allows pre-scheduled sales to proceed during periods when discretionary trading would otherwise be restricted by blackout windows or material non-public information.

The limitation to this strategy, however, is that requires patience. Additionally, it leaves the position partially exposed during the wind-down period. It also does not eliminate the eventual tax obligation but rather spreads it out.

Strategy 2: Options-Based Hedging

For investors who want downside protection without selling, options strategies reduce risk while maintaining ownership and deferring tax consequences. Three approaches are most common:

• Protective puts: Purchasing put options gives the right to sell shares at a predetermined strike price. This effectively acts as insurance against a decline below that level. The cost is the premium paid.
• Covered calls: Selling call options against the existing position generates premium income but caps upside above the strike price.
• Equity collars: A cashless collar pairs the purchase of a put with the sale of a call, using the call premium to offset the put cost. The result is a defined price band with downside protection at little or no net cost.

Options strategies can have complex tax implications, though. This includes the potential to disrupt long-term capital gains treatment or trigger constructive sale rules.

Additionally, although options provide temporary protection, investors must renew it regularly. Options also do not reduce the position size. As a result, they buy time as opposed to actually solving the concentration problem.

Strategy 3: Exchange Funds and Direct Indexing

For investors who need broader diversification without triggering immediate capital gains, two structurally different approaches can defer or offset tax liability: 

• Exchange funds: An investor contributes a concentrated position to a pooled fund alongside other investors contributing their own concentrated positions. The contribution is generally a non-taxable event. After a minimum seven-year holding period, the investor receives a diversified basket of stocks rather than the original holding. The original cost basis carries over to the new shares, and taxes are deferred until those shares are eventually sold.

• Direct indexing: With direct indexing, the investor funds a separately managed account with the concentrated stock plus additional cash. Then, a manager builds a diversified portfolio while systematically harvesting losses on the new holdings to offset gains from incremental sales of the concentrated position. The account can also be customized to exclude the concentrated stock’s sector to reduce duplicative exposure.

Strategy 4: Charitable Giving Strategies

For investors with genuine philanthropic intent, donating appreciated shares is one of the most tax-efficient ways to reduce a concentrated position. When securities held for more than one year are donated directly to a qualified charity, the donor can typically claim a fair market value deduction, and neither the donor nor the charity pays capital gains tax on the built-in appreciation.

Two structures expand on the basic direct-donation approach:

• Donor-advised funds (DAFs): A DAF allows a tax-deductible donation in the year of contribution while preserving advisory control over the timing and recipients of subsequent grants. Donated securities are deductible up to 30% of adjusted gross income. Excess deductions are carried forward for up to five years.
• Charitable remainder trusts (CRTs): Appreciated stock contributed to a CRT can be sold by the trust and reinvested in a diversified portfolio without the donor realizing immediate capital gains tax. The donor receives annual income payments over the trust term, and the remaining assets pass to designated charities when the trust ends. CRTs are irrevocable and require legal drafting and ongoing administration.

Strategy 5: Gifting to Family and Estate Planning

Gifting appreciated shares to family members can reduce the concentrated position while shifting future appreciation and the associated tax liability to recipients who may pay less on eventual gains.

The 2026 annual gift tax exclusion is $19,000 per recipient, and married couples can give $38,000 per recipient without filing a gift tax return. It’s possible to make larger gifts using the lifetime gift and estate tax exemption. The recipient inherits the donor’s cost basis and will owe capital gains tax when they eventually sell. That said, family members in lower tax brackets may pay 0% to 15% on long-term capital gains, versus 20% plus the 3.8% net investment income tax that applies to many donors.

The most powerful estate planning consideration is the step-up in basis at death. Heirs generally receive a step-up in basis to the fair market value on the date of death, which eliminates the embedded capital gain entirely. For investors with sufficient other liquidity, holding a portion of a concentrated position until death, rather than selling it, can be a deliberate estate planning choice.

Bottom Line

No single strategy is right for every situation. The right approach depends on the size of the position and the embedded cost basis, as well as the investor’s tax bracket, liquidity needs, charitable intent, trading restrictions and time horizon. Many investors benefit from a multi-pronged approach. This would look like gradually selling part of the position, hedging another portion with a collar, gifting some shares to family members and directing the most appreciated shares to a donor-advised fund or charitable trust.

Tips for Investment Management

• A financial advisor can help you manage your portfolio and choose the right investments for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Consider using an investment calculator to estimate how an investment can grow over time.

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