Blog Article

Navigating Wealth Transformation Using Concentrated Stock Management

Paige Lee

By Paige Lee, Wealth Advisor CFA®, CFP®, CSRIC®
Published On 04/09/2024

Companies have increasingly turned to compensating their employees with company stock over greater cash salaries and cash bonuses. As your wealth accumulates in one stock, the consequences of your financial decisions also grow. If you are one of the many mid-career professionals holding a significant amount of your net worth in your company’s stock, you may wonder what you should be doing with all the shares that have now been built up in a brokerage account. In this article, we’ll look at strategies for transitioning from a concentrated stock position to a diversified portfolio to optimize your financial future. You’ve worked hard throughout your career, checking all the right boxes and diligently accumulating wealth. Don’t let the lack of a plan hamper your ability to retire in the future.


Risk Management in Wealth Transformation


We can define a concentrated stock position in many different ways. Some say it is a position that makes up 25% or more of your total portfolio. Many suggest that a concentrated position is anything over 10% of your total portfolio. Regardless of which definition you use, the vital thing to know if you own a lot of stock in one particular company is how it would impact your financial plan if this position went to zero.


While this may seem like an extreme example, there are many instances in which large, established companies have failed. Running this scenario is the ultimate stress test for a portfolio with a concentrated stock position. The failure of your one concentrated stock position may result in you needing to work for five more years. This information is helpful as it allows you to determine if this is a risk you’re willing to take.


I recently started working with a couple who had most of their net worth tied up in one stock. This stock has more than doubled in value over the past year, and many continue to tout the growth potential of this company. Diversifying out of this position and putting the proceeds into a diversified portfolio would allow these clients to achieve financial independence within the next couple of years. Losing the ability to retire early was not a risk these clients were willing to take. We liquidated this position over two tax years and set aside a portion of the proceeds to cover the respective tax liability.


In a recent conversation with this family, they mentioned having much more peace of mind, knowing their future was more secure. If the objective had been to try to accumulate the most wealth, we may have decided to continue holding that one stock. In this case, the goal was to acknowledge when we’ve gotten to “enough” and when it might be smart to take some chips off the table in exchange for more stability and more options in the future.


Individual Stock Risk


Individual stocks are risky! Think about the companies that were prominent when your parents or grandparents were your age. How many of them do you think are still going strong today? Below is a chart that looks at the percentage of stocks that outperform the market over different periods of time. We can see that even over a period of five years, about one in every five companies will be delisted, many for negative reasons. Only about a third of companies will survive and outperform the market over a five-year period. The longer the time period, the less likely an individual stock will outperform the market. Over twenty years, only one in five companies will survive and outperform the market. The odds are significantly stacked against you if you hope to beat the market by holding onto a concentrated position long term. Yes, you may get lucky over the short term, but is it really worth it to continue rolling the dice?












Leveraging Tax Planning to Meet Your Financial Goals


One of the most common objections when considering selling a concentrated position is the inherent tax consequences. The unfortunate truth, however, is that unless you hold onto an investment until you die, you will have to pay tax on the growth at some point. I encourage people to think of paying long-term capital gains taxes as a good thing because it means your investments went up and you made money. A surprisingly small fluctuation in stock price can eliminate any benefit of delaying the recognition of capital gains tax. We also know that long-term capital gains taxes are more favorable than the ordinary income taxes you would pay on your salary.


I often find that planning for future tax bills is half the battle. If you recognize significant capital gains, you don’t want to be caught off guard come tax time. I’ve worked with many clients to determine appropriate estimated tax payments following a large company stock sale. You will also want to consider any applicable state taxes. Washington state has a new long-term capital gains tax that kicks in once a certain amount of gains have been recognized in a particular year. Calculating and accounting for these tax consequences allows you to reinvest the remaining proceeds from a stock sale with more confidence.


How a Wealth Management Advisor Can Support You


Implementing wealth diversification strategies is paramount to safeguarding your assets and aligning with your financial objectives. Diversifying your portfolio beyond concentrated stock holdings can mitigate risk and enhance long-term financial stability. While the allure of outperforming the market may be tempting, the odds are stacked against investors relying solely on a concentrated position. A comprehensive approach to wealth management involves spreading risk across various asset classes and investment vehicles, ensuring a balanced and resilient portfolio.


Navigating the complexities of a concentrated stock divestment strategy requires professional guidance. Working with a Merriman Wealth Advisor provides the planning and expertise necessary to achieve your financial goals. Our team offers personalized strategies tailored to your unique circumstances, empowering you to make informed decisions and navigate the path to retirement with confidence. From developing a divestment plan for concentrated positions to optimizing tax efficiency, we’re here to guide you every step of the way.


Embark on your own journey of wealth transformation with the support of our experienced team. Watch for our upcoming webinar on Wealth Transformation and Concentrated Stock Management to gain valuable insights and expert advice. Additionally, feel free to share your thoughts, schedule a consultation, or reach out via email to discuss your unique financial needs and objectives. Together, let’s navigate the path to financial freedom and security.




Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as

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Paige Lee

By Paige Lee, Wealth Advisor CFA®, CFP®, CSRIC®

Paige worked in the tech industry for several years and is passionate about helping tech employees and other mid-career professionals bridge the gap between their intentions and actions. Paige recognizes that money is incredibly personal and strives to create an open and non-judgmental space where you can invest with your values and make progress towards your goals.

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