It’s gonna happen!

While we don’t purposefully build portfolios using concentrated stock positions, they end up over here nonetheless for a handful of reasons:

• client bought XYZ years ago and now it’s highly appreciated and a liquidation would cause a significant capital gain tax liability (if we’re talking about a taxable brokerage account)
• client inherited a position from their favorite grandparent and there’s an emotional attachment in keeping it
• Employer stock units vest and suddenly a client is sitting on a pile of company stock
• Similar scenario but employer stock accumulates because of ESPP, client totally loves the company but you know how that can go.
• list goes on.

First let’s not hit the panic button.

We should start by defining what constitutes a concentrated position.

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a single stock position is considered concentrated when it’s value is 5% or more of the total value of the portfolio in which it resides.

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Still not hitting the panic button.

How we handle that position very much depends on the reason that position became concentrated.

• If it’s a capital gain tax issue, let’s draft a plan to maybe reduce it prudently over time while adjusting the rest of the portfolio if needed. Maybe consider donating highly appreciated stock! (then document it)
• If it’s an emotional attachment, let’s coach through that while respecting one’s feelings. (then document it)
• If it’s an employer stock issue, consider tax implications then have a plan to pair it down, either all at once or in chunks. (then document it)

Notice a trend here?

How we proactively document these scenarios is critical.