A concentrated stock position can be a highly personal and complex part of financial planning. Many of the people we work with at Quorum acquire large positions in specific companies for one of two reasons: equity-based compensation like RSUs or stock options or a family inheritance. The personal significance of those shares is one of many factors that goes into our recommendation for what to do with the position. Here are the three approaches we take to concentrated stock and why you might consider each.
Common ways of acquiring concentrated stock
Before we get into the three approaches to deal with concentrated stock, I want to dig a bit deeper into the way the shares were acquired.
If you acquire multiple shares in a single company via restricted stock units (RSUs), it’s likely that you have a highly personal interest in those shares—you’re employed by the company so you want it to do well. You might also have timeline considerations to think about—like a vesting schedule, as well as varying cost bases at which your shares were acquired. This can add a different level of complexity to the equation that you may want to discuss with a financial advisor.
If you receive a concentrated stock position as part of an inheritance, you may want to discuss the tax ramifications with the family member sharing the stock position with you. The “gifter” may be required to pay significant capital gains on the shares, depending on when they were purchased. As the recipient, however, receiving the shares at a single cost basis can help simplify the conversations you have with your advisor.
Three approaches to concentrated stock: hold, sell, or hedge
If you really love the company you’re invested in, you may choose to hold the position. This can be risky if the concentrated position is a significant part of your portfolio—for example, more than 5%. This comes down to one simple factor: volatility. If something sends those shares plummeting, it could have an outsized impact on your portfolio. Of course, the opposite can be true as well, if the company experiences outsized growth.
To manage volatility, you could potentially sell your shares and use the proceeds to invest in a more diverse array of stocks, such as exchange-traded funds. You could select a fund in a similar industry to mimic exposure to the company while mitigating some of the risk, or select an investment that is more aligned with your overall portfolio, including your long-term goals and risk tolerance.
Finally, you might want to hedge. Hedging strategies, which might involve sophisticated techniques like selling call options, can help you recoup potential income while holding onto the position. They can also allow you to exit a position gradually, capturing potential gains along the way.
Of course, you don’t have to pick just one of these strategies. You may want to use all three, or various combinations thereof, depending on the concentrated position and where you’re at in your own financial plan.
The best way to figure out what to do with a concentrated stock position is to schedule a personalized consultation with an advisor. If your advisor isn’t talking to you about all three of these options, be sure to ask follow-up questions to ensure you understand that advisor’s capabilities and what choices you have available to you.
