Financial Planning Month – Ask a Wealth Confidant: Concentrated Stock

October is National Financial Planning Month, and our Wealth Confidants are answering some of your most frequently asked questions. This week, we address a commonly asked question that we hear from investors about being over-invested in a particular stock, often in the technology sector . . .

Ask a Wealth Confidant:

Q. I have an individual stock that is highly appreciated and has become a concentrated portion of my portfolio. With markets at all-time highs, how do I best manage this stock in a smart way? 

A. With the stock market at/near all-time highs, many investors, particularly those who work in the technology industry and have company stock, find themselves with highly-appreciated and highly-concentrated stock positions. This means a large percentage of their overall portfolio is held in a small number of stocks or even in a single company’s stock. Many of these investors realize it may be a smart move to take some action to diversify their portfolio but may feel stuck or reluctant to sell. There are many reasons why it can be difficult to sell highly concentrated stock, including negative tax implications, having an emotional attachment to the stock, or because they are not legally allowed to sell company shares because of their position within the company. 

While many investment advisors are focused on a one-size-fits-all approach of advising clients to simply sell off concentrated stock, Highland’s approach to serving clients is more nuanced and tailored to what is most important to each individual, based on specific aspects of their financial life. At Highland, our advisors are experienced in managing investments and financial planning, and they are all trained coaches, helping clients explore and align around what is most important to them in terms of personal goals. This combination of financial knowledge and emotional intelligence is what we call a “Wealth Confidant.”  

When it comes to managing a highly concentrated stock portfolio, our Wealth Confidants begin by helping clients align around their most important values, then design prudent investment and planning guidelines, and manage a high-caliber implementation plan. We’ve worked with several families recently who have worked for big tech companies for many years and have accrued millions in returns on their company stock. They feel deeply loyal to their companies, and this stock is more than just a financial investment – it represents emotional and social ties to colleagues, their company’s values and the work they’ve poured their lives into for decades. 

We approach the question of diversification with great sensitivity to everything this stock means to these individuals. A particularly beneficial strategy as part of a diversification plan for highly concentrated stock is charitable giving. Donating some of the concentrated company stock to charities (or to a Donor Advised Fund, if specific charities have not been determined) puts the stockholder in a win-win situation. They can bestow an incredible gift to their community, while also enjoying tax advantages that will help offset taxable gains that come from the inevitable need to sell some company stock as part of a holistic diversification approach.

Recently, we worked with a couple with concentrated company stock who wanted to teach their teenage children about giving back to the community. They had their sons do the research to identify worthy causes and organizations in their area that might benefit from a stock donation. The kids got to learn about needs in their community, they met with nonprofits to learn the impact a donation could have, and they were included in discussions about a major donation of valuable stock from their family. We helped create an incredibly meaningful experience for this family during the process of diversifying their concentrated stock. 

It is important to address a situation where a portfolio is concentrated in a small number of stocks to protect the investor. Highland has the experience and tools to optimize strategies, including diversifying in a tax-smart way and utilizing charitable giving to hedge risk. Our approach is through the lens of optimizing value, lowering costs, and minimizing taxes, all while helping to connect your money to a life of meaning and purpose. 

For a more in-depth look at Highland’s approach to managing highly concentrated stock within a portfolio, check out our recent article Concentrated Stock? We’ve Got You Covered.