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Have you accumulated a significant portion of your net worth in a single company’s stock and wondered, “How do I manage a concentrated equity position without risking my financial future?” If so, you’re not alone. Many individuals—whether through company stock plans, investments, or equity compensation—find themselves holding too much of one stock, and that can expose you to unnecessary risk.
In this article, we explore concentrated equity strategies—what they are, who needs them, and how they can help you diversify risk, reduce taxes, and stay on track with your long-term financial goals.
Why a Concentrated Equity Strategy Matters
A concentrated equity strategy is a personalized, structured approach designed to help reduce risk while maximizing potential reward. The goal is to protect your financial future and align your investments with your broader goals—whether that’s early retirement, funding education, or buying that dream vacation home.
A well-executed strategy includes:
- Risk assessment
- Tax planning
- Diversification
- Charitable and estate planning
These strategies require coordination between your investment, tax, and financial planning advisors.
Common Types of Concentrated Equity
Concentrated equity positions can come in several forms:
1. Common Stock
These are shares of publicly traded companies such as Apple, Amazon, or Nvidia. The most straightforward way to reduce concentration risk is to sell. However, if the shares have appreciated significantly, selling could trigger substantial capital gains taxes—often at long-term capital gains rates.
Many employees acquire common stock through Employee Stock Purchase Plans (ESPPs), which allow them to buy shares at a discount (often 15%). Over time, these shares can grow into a significant part of your portfolio.
2. Restricted Stock Units (RSUs) and Performance Stock Units (PSUs)
RSUs and PSUs are forms of equity compensation. Shares are awarded but do not fully belong to the employee until a vesting period ends. Upon vesting, the value is taxed as ordinary income. Afterward, any appreciation is taxed at capital gains rates upon sale.
3. Non-Qualified Stock Options (NSOs)
With NSOs, employees pay taxes when exercising the option (difference between strike price and market price is taxed as income). Gains from selling the stock are later taxed at capital gains rates.
4. Incentive Stock Options (ISOs)
ISOs offer potential tax advantages. If certain conditions are met, gains can be taxed at the more favorable long-term capital gains rate. But they may also trigger Alternative Minimum Tax (AMT) liabilities if not planned properly.
TIP: Understanding your stock type and the applicable tax implications is critical to building an effective concentrated equity strategy.
How to Build a Concentrated Equity Strategy
Step 1: Measure Risk and Reward
Ask yourself:
- How much more upside potential is realistic for this stock?
- What are the chances it underperforms?
Even if you believe in your company, external factors—economic shifts, industry disruption, regulatory changes—can affect stock price. Don’t confuse loyalty with financial prudence.
Step 2: Align With Your Financial Plan
Start with your goals: retirement, family security, philanthropy, travel, or business ventures. A solid financial plan grounds your investment decisions and gives context to how much risk is acceptable.
At A&I Wealth Management, we use a values-based discovery process to ensure your strategy supports what matters most to you.
Step 3: Plan for Taxes
Taxes are often the biggest hurdle to diversifying a concentrated equity position. But they can be managed through:
- Tax-loss harvesting
- Spreading sales across tax years
- Charitable giving
- Utilizing retirement account contributions for tax offsetting
Work with a planner and a tax professional to minimize the bite and increase long-term efficiency.
Step 4: Plan for Gifting and Giving
Gifting highly appreciated stock to:
- Charities (who pay no taxes on gains)
- Family members in lower tax brackets
…can be an effective way to reduce concentration risk and accomplish philanthropic or family wealth transfer goals.
You’ll often receive a fair market value tax deduction while avoiding capital gains altogether.
Step 5: Diversify
Diversification is your most powerful tool against the risks of overconcentration. Once your financial essentials are met, you may choose to retain some concentrated holdings. But until then, consider reducing exposure as an obligation—not just a recommendation.
“First safety, then speculation.” That’s the golden rule.
Real-Life Example: When the Stock Rises—and Falls
Ted, a long-time tech executive, was rewarded with RSUs and PSUs. He watched his company’s stock soar during the pandemic and used part of his gains to purchase a dream mountain cabin. However, the stock later plummeted, leaving him with a hefty tax bill and rising maintenance costs.
Ted wished he had diversified sooner. Still, thanks to a well-thought-out financial plan, he achieved many of his goals—even if the path was rockier than expected.
Lesson: Concentrated equity may build wealth fast—but without strategy, it can unravel just as quickly.
Final Thoughts
Managing concentrated equity isn’t just about maximizing value—it’s about protecting your future. With the right strategy, you can turn a potential risk into a tool for financial freedom, security, and impact.
Ready to Build Your Concentrated Equity Strategy?
At A&I Wealth Management, our advisors specialize in helping clients navigate the complex tax, risk, and planning challenges of concentrated equity. Whether you’ve been granted stock options, acquired company shares over time, or hold legacy positions, a customized strategy can make all the difference.
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Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as financial or legal advice. Please consult with a qualified professional for advice regarding your specific situation.
DISCLOSURE: Client stories included in this blog reflect hypothetical client situations that represent those commonly encountered by AIWM representatives.
