How to Diversify a Large Position in Your Company’s Stock
If you have spent several years at a fast-growing company, there is a good chance a large share of your net worth now sits in a single stock. Restricted stock units (RSUs) accumulated while the stock price increased. Now the stock makes up a large slice of your net worth. What should you do now?
Why is this a problem?
When one stock makes up 40%, 60%, or 80% of your investable assets, the trajectory of your entire financial life rests on the performance of one company. Your salary, bonus, future RSU vesting, and vested RSUs all depend on the company’s performance. Your eggs are now in one basket. When the stock price increases, you celebrate. When the company falters and the stock drops, the rapid decline in your net worth (and possibly increased job uncertainty) can feel incredibly stressful.
A few questions to consider:
● Is this a risk worth taking?
● How does your employer stock exposure reflect your family’s financial goals?
● Do you even need to take this risk anymore?
Why selling feels expensive
A key reason many people resist selling is tax impact. Shares that vested years ago often carry a low cost basis (the value on the date of vesting). Selling triggers a capital gain on the increased value over time (sale prices minus cost basis). At the federal level, long-term gains are taxed up to 23.8 percent, and a state income tax stacks on top. A large sale in one year may also lift you into higher brackets.
The strategies below provide options for reducing concentration while managing the taxes and your own tolerance for risk.
Sell in stages
The simplest approach is to sell the position down over time on a set schedule. You might trim a fixed percentage each quarter, or sell shares as they vest so the position stops growing. Spreading sales across several tax years keeps you from bunching gains into one return, and a written plan removes the temptation to wait for a better price that may never come. The tradeoff is that you pay tax on every sale, and if the stock keeps climbing you will feel the cost of having sold early.
Another strategy is to divide your entire position into thirds. The first third is sold immediately to reduce concentration risk, the second third is sold strategically over time, and the final third is held indefinitely.
For most people, a disciplined approach that removes emotional decision-making is critical.
Integrate tax loss harvesting
A popular strategy is a Separately Managed Account (SMA) with an aggressive tax loss harvesting overlay. The strategy works like this: you sell a portion of your employer stock and fund an SMA with the sales proceeds. An investment manager invests the proceeds in individual stocks, which track a diversified index or broader strategy. Stocks that decline in value throughout the year are sold and replaced with substitutes. The sales create capital losses, which offset the capital gains incurred when you sold your employer stock.
As you systematically sell your concentrated position over time, the tax loss harvesting approach reduces the tax impact. The strategy can also exclude specific stocks or sectors altogether. This approach can be especially valuable if you are in a high tax bracket during the sell-down phase.
Exchange funds
An exchange fund lets you contribute your appreciated shares into a pooled partnership alongside other investors with their own concentrated positions. In return you receive a stake in a diversified basket and defer the gain rather than realizing it today. The appeal is diversification without an immediate tax bill. However, there are major disadvantages worth considering. Your money is typically locked up for at least seven years, fees tend to be high, and you inherit the fund's low basis when you eventually exit.
Hedge with a collar
If you want protection against a sharp drop without selling, you can buy a put option for downside coverage and sell a call option to help pay for it. This structure is known as a collar. The collar effectively locks in your return within a band (i.e. protects against price decline while giving up upside) and buys you time. It does not diversify the position or lower your eventual tax. Also, if the band is set too tightly, the IRS can treat it as a constructive sale and tax you as though you had sold the shares. The collar needs to be managed carefully.
Give some of it away
Appreciated stock is one of the most efficient assets to donate. Giving shares directly to a donor-advised fund (DAF) or a charity lets you avoid the capital gains tax and take a deduction for the full market value, assuming you have held them long enough. The DAF allows you to donate shares in the current calendar year to receive the tax benefits, while postponing the granting decision (which charity to donate the money to) to a future year. Donating a portion of the most highly appreciated shares is often a core component of any diversification strategy.
Where to start
There is no single right answer, and most people combine a few of these into a disciplined strategy executed over time. A common path is:
● Stop the position from growing (e.g. sell future-vesting RSUs immediately upon vesting)
● Sell and/or donate a portion of the total position today to immediately reduce concentration risk
● Sell the next portion systematically over a defined period
● Incorporate an SMA with a tax loss harvesting approach to mitigate tax impact
● Determine a capped exposure (e.g. 20% of investable assets) you feel comfortable holding indefinitely based on your goals.
Many companies have performed exceptionally well over the last decade. Employees have an opportunity to reduce concentration risk, diversify proceeds into a more stable investment strategy, and provide greater peace of mind for themselves and their families. The employees who end up in a difficult situation are usually the ones who kept waiting for a perfect exit. Consult a team of experienced investment and tax professionals to help you design an approach that fits your goals and risk tolerance.