Managing Concentrated Stock Positions

It is common for affluent investors to have concentrated equity positions in their portfolios. Concentrated wealth can develop from a number of sources, such as an equity compensation structure, a sale of a business, high-profile IPOs or an inheritance. It may be tempting to hold onto those shares in a time of consistently bullish equity market environment, such as that observed in 2017, which was a year of low volatility and a relentless rise in stock prices that led to a number of new highs and milestones in key U.S. market indices. However, markets are bound to hit turbulence: Corrections occur, and volatility comes and goes in varying degrees. Given that markets don’t move in just one direction, understanding and managing the risks associated with concentrated stock positions become a crucial point in securing one’s wealth.

While there is no one-size-fits-all solution in managing concentrated stocks, it would be fair to say that a single stock representing a significant share of a portfolio is assigned a disproportionate weight and that the book is not well diversified. A lack of diversification means the position is more vulnerable to greater volatility than is a diversified portfolio, and as such, could experience a heavier drag on the position’s compounded growth.

Furthermore, all equity investors face market risk, but those with concentrated positions also face idiosyncratic risk, which are challenges unique to that single stock that could hurt its performance.

Diversification can help reduce overall risk, and a few practical and executable changes that can be implemented include the following.

  • Outright liquidation
  • Staged selling
  • Hedging via derivatives
  • Investing in exchange funds
  • Charitable techniques

There is little certainty regarding the future of an individual stock, and the risk imposed on concentrated positions can be substantial. It would do investors well to consider the risk-reward dynamics of their investments and be open to allocating their assets differently to accomplish their financial objectives over the long term.

Click here to read the full white paper, which includes quantitative analyses and further detail on the five potential methods of diversifying a portfolio.