It’s not uncommon for executives to build wealth through a concentrated position in one or a few stocks. This most commonly happens through equity compensation such as Restricted Stock Units (RSUs) or stock options, but it can also occur through other mechanisms such as inheritance.
While this concentrated success story may feel like a triumph, it carries significant risks that can jeopardize your long-term financial goals if the stock’s price declines.
History has shown that even market leaders can lose their edge. Take IBM, once the gold standard in technology and computing, which has struggled to keep pace with newer competitors like Microsoft and Amazon in the cloud computing space. Or Kodak, a pioneer in photography, failed to adapt to the digital revolution and ultimately declared bankruptcy in 2012.
These examples highlight a vital lesson: Past success does not guarantee future dominance.
Many investors hold onto concentrated stock positions due to emotional ties, such as gratitude for past gains or fear of missing out on future growth. However, no single company can maintain market dominance indefinitely. Diversifying your portfolio can protect against these emotional pitfalls and mitigate unnecessary risks.
Diversification is a cornerstone of our investment philosophy, serving as a vital risk management tool. By spreading investments across a broad range of assets, diversification helps minimize volatility and enhance the potential for long-term wealth preservation and growth.
Properly diversified portfolios reduce the risk of being overly exposed to underperforming areas of the market, offering a more balanced and resilient approach to achieving financial goals.
No stock or sector leads forever. Shifts in market dynamics — whether driven by innovation, consumer trends, or macroeconomic forces — often disrupt incumbents. For instance, the tech boom of the 1990s gave way to the housing boom of the 2000s, and each new era brought different market leaders.
Diversifying ensures you’re not overly reliant on a single stock or sector and helps you capitalize on changing market regimes.
Reducing concentration risk doesn’t mean abandoning your holdings entirely. Strategies like tax-efficient sales, exchange funds, hedging, and charitable gifting can help you diversify without incurring unnecessary costs or sacrificing your financial goals.
Every investor’s situation is unique, and the best approach depends on the value of your portfolio, unrealized gains, and long-term objectives.
Here are a few concentrated stock position strategies:
At SDT, we specialize in helping clients manage concentrated stock positions and create diversified portfolios tailored to their goals. Contact us today to explore strategies that can help protect and grow your wealth.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.
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As the Director of Planning & Strategy for Spaugh Dameron Tenny, Jordan applies his academic and practical experience in the creation and maintenance of the firm’s financial plans, as well as coordinating research efforts for products and strategies that may benefit clients. Originally from Canada, Jordan came to Charlotte on a golf scholarship where he attended Queens University of Charlotte. In addition, Jordan has a Master’s degree in Wealth and Trust Management.
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