Too Much of a Good Thing: Managing Concentrated Holdings

Abstract

Having a concentrated stock or other ownership position is common for corporate executives, offering many potential rewards but also substantial risks. The “right” stock can be a significant wealth creator, but concentrating in a single position can become a wealth destroyer. There are many disciplines and techniques that should be considered to address the risks of concentration, though each has its advantages and disadvantages. A gradual diversification strategy often works best, though factors such as taxes, risk tolerance, time horizon, and legal restrictions must be considered. Various tax-reduction strategies are available to manage the tax costs of any sales. There are also several hedging strategies that should be considered, along with the potential use of exchange funds or charitable vehicles.