Bridging Concentrated Stock and Diversification

by Alex Golubev, Merriman Portfolio Manager, CFA®

If you have accumulated significant wealth in just a few stocks, congratulations! But beware that not diversifying now may be one of the costliest decisions of your life. 

Usually it’s best to diversify as soon as possible, but everyone’s situation is different. It’s often possible to hedge the stock (using options) as a bridge to diversification. This gives you the best of both worlds by:

  • Limiting downside stock risk, prior to diversifying.
  • Leaving some upside, which could help pay capital gains taxes.

When making complex and important decisions, particularly those outside our expertise, we often revert to gut instinct and emotion. Investors often hold off from diversifying concentrated stock positions due to concerns over taxes, perceptions of insider knowledge in the company, or even feelings of loyalty (and guilt).

While these justifications may feel intuitive, the consequences of relying on them can be catastrophic to your financial well-being. 

Understanding all the risks and factors of divesting and hedging concentrated stock positions requires relatively sophisticated modeling that reflects your goals, circumstances and even preferences. 

To help you better understand this topic, we simplified it into an e-book. 

There is no one-size-fits-all approach. That’s why Merriman is here – to educate, explain and implement! For over 35 years, we’ve been working with clients to meet their financial goals by growing and preserving their wealth.

If you need help sorting this all out, let’s talk.