Holding a significant position in a single stock—often linked to your employer—may seem advantageous… until the tide turns. This concentration significantly increases your risk. At We Financial, we regularly assist clients in diversifying such positions. Here are three approaches we use, depending on the case.
1. Selling Smartly: Focus on Net After-Tax Amount
Many believe they must wait a year to benefit from the long-term tax rate. But what truly matters is the net amount after taxes, not just the tax percentage.
For example, if you’re looking to free up the same amount:
- Short-term gain: $100 taxed at 50% → tax = $50
- Long-term gain: $1,000 taxed at 30% → tax = $300
It might be wiser to sell lots with a low cost basis and more modest gains. We often help clients precisely analyze their lots to establish a strategic sales plan.
Note: If you receive RSUs (Restricted Stock Units), they are taxed at vesting as ordinary income. Therefore, it’s generally advisable to sell them immediately to avoid additional risk in the context of diversification.
2. Creating Liquidity Without Selling
a. Borrowing Against Your Position
You can use your shares as collateral to borrow at a low cost and invest elsewhere—in a diversified portfolio or in an ETF inversely correlated to your initial position to limit overall risk.
b. Hedging with Options (Puts, Calls)
You can also use options to hedge against a decline in the stock (puts) or generate additional income (covered calls).
Caution: These strategies involve uncertainties, particularly regarding price, liquidity, and taxation. We use them only in very specific cases when they are truly justified.
c. Box Spread Strategy
More sophisticated, this strategy involves creating a synthetic position via options to obtain fixed and predictable rate financing.
Although more technical, this approach is often easier to understand and anticipate than traditional hedges with puts and calls.
3. Utilizing an Exchange Fund
An Exchange Fund allows you to contribute your concentrated stock into a pooled fund with other investors and receive in return a share of a diversified portfolio—without triggering immediate taxation.
✅ Advantages:
– Diversification without selling
– No realization of capital gains
– Protection against concentration
❌ Disadvantages:
– Lock-in period of 7 years
– Less control over underlying assets
– Limited liquidity if needed
This is a solution we offer to clients who have significant capital gains on stocks received several years ago.
In Summary
Diversifying a concentrated position requires a tailored approach. There’s no single right solution, but a range of strategies to adapt to your tax, estate, and personal situation.
You can schedule a free initial appointment here.
Your advisor,
Guillaume
Guillaume Decalf is a financial advisor registered with the SEC (CRD #7003690 – Firm CRD #298549).. He is the founder of the We Financial Group an independent firm specializing in financial planning and investments. He has advised over 600 households and oversees more than $100 million in assets under management (as of 12/31/2024).
Being registered with the SEC does not constitute an endorsement of competence or quality of service. More information at adviserinfo.sec.gov.
