Concentrated stock risk: how to diversify

Once a single stock climbs past 10% to 20% of your total portfolio, you're carrying what counts as a concentrated position. And honestly, it's common for someone's entire portfolio to be one or two stocks and nothing else.

Getting to a concentrated position usually means something worked out. Years of RSU grants piling up faster than you sold them. A startup option that hit. A single bet from ten years back that's now worth ten times what you paid.

It reads like a track record of good calls. But once one company is 40% of your net worth, you're exposed to that single company's fortunes in a way a spread-out portfolio never is, and that exposure sticks around no matter how well the stock has treated you up to now.

What actually counts as concentrated?

No regulator draws a hard line here, but financial planners generally treat 10% to 20% of investable net worth in a single stock as the point worth flagging. Past that, most advisors start paying attention. Past 25%, that one holding effectively decides how your whole portfolio performs, for better or worse.

Concentration builds up through circumstance, not through a mistake you made. That's exactly why it's so easy to lose track of how much risk has quietly accumulated.

The risk is bigger than it feels day to day

This isn't a theoretical worry. Even strong companies can shed most of their market value in a matter of months. Meta lost close to 80% of its value in 2022 from the prior year's peak, hit by slowing revenue, a real drop in daily users, and Apple's ad-tracking changes, before eventually clawing its way back.

That's the kind of thing a concentrated position stays exposed to: a rough product cycle, a regulatory hit, a competitor pulling ahead, a leadership misstep.

There's a version of this risk specific to how most people actually end up concentrated, through employment and RSUs. When the stock you're overweight in is also the stock that pays your salary, a downturn tends to show up right alongside layoffs or a hiring freeze, exactly when you'd most want the rest of your finances to hold steady.

None of this makes the stock a bad holding. It just means a portfolio riding on one company carries a kind of risk a diversified one simply avoids.

What it actually costs to fix

The standard fix is simple enough: sell down the position, put the proceeds into something diversified. What makes people hesitate usually has nothing to do with faith in the stock. It's the tax bill.

Picture a mid-career engineer at a large tech company sitting on $1.2 million in vested shares, with a cost basis of just $150,000 built up over years of vesting at much lower prices. Diversifying by selling realizes about $1.05 million in long-term gains. Combined federal and state rates in a high-tax state can reach 35 to 37%, putting the resulting bill somewhere north of $350,000, none of which ends up in the new, diversified portfolio.

Put simply: hand over six figures now, or keep carrying the concentration risk to push that bill down the road. No wonder so many people just leave the position alone.

There's more than one way to fix this

A straight sale isn't the only option on the table.

A collar caps your downside without a sale, but it costs money to run and it doesn't actually spread your risk. You're still holding the same one stock, just with a cushion underneath it. Donating is genuinely efficient from a tax standpoint, but only for the slice of your position you're truly ready to give away for good.

If real diversification without a tax hit today is the goal, an exchange fund is the option purpose-built for exactly this.

Diversifying doesn't have to mean selling — see if you qualify to join Glidepath.

Why an exchange fund handles this differently

Pooling is the mechanism: an exchange fund gathers contributed stock from many investors into one vehicle. When your net worth is dominated by one stock, trading those shares for a stake in the pool, rather than selling them for cash, gets you diversified without the tax bill. What comes back is a proportional interest in a diversified pool, not cash, so nothing gets sold and nothing gets taxed under Section 721 of the tax code.

The cost is time. Holding onto that deferral means staying in the fund for seven years. After that, you can redeem a diversified basket of holdings, carrying your original cost basis forward with you. The deferred tax hasn't vanished, but meanwhile the capital that would've gone to the IRS has spent seven years growing inside a diversified portfolio.

Back to the engineer: rather than selling that $1.2 million position and losing roughly $375,000 to tax before reinvesting whatever's left, the full $1.2 million moves into the exchange fund untouched. Every dollar that would've been taxed instead stays invested and diversified for the full seven years before the deferred bill comes due.

Glidepath runs as an exchange fund with zero management fee, made possible by revenue-generating assets serving as its qualifying illiquid asset in place of the real estate other providers rely on. Standard accredited investor rules apply: individual income above $200,000, joint income above $300,000, or net worth above $1 million excluding your home, plus a $100,000 minimum to get started.

Carrying a concentrated position and curious what an exchange fund would actually mean for your numbers? Get started to see if you qualify.