4 Strategies To Break Your Concentration

Concentration is usually a good thing. Whether you’re buckling down on a project at work or learning a new skill, focus pays off. But in a stock portfolio, too much concentration can be risky. If a single holding accounts for 10% or more of your overall wealth, it might be time to break that concentration.

Think about it—when a stock is on a run of outperformance and you hold a big position, your portfolio benefits proportionately. But when markets turn or the company behind the stock has a poor quarter or encounters an obstacle that shakes investor confidence, you could experience outsized losses in your portfolio.

And if you also work for the company you’re invested in? Your financial future is doubly tied to that organization. Should something happen to that company or your job, both your income and assets could be impacted. That’s why mitigating concentration risk is so important.

As we’ve seen this year, volatility and uncertainty have ramped up, sending the U.S. stock market to the brink of bear market territory before it rallied in recent weeks. On the heels of that bounce, now is the perfect time to assess concentrated positions on your balance sheet from a position of strength.

Here’s an overview of four strategies we use to assist our clients with their concentrated positions. Your advisor can fill you in on how we can help with any of them, as well as other options to consider.

1. Giving. Giving is always a meaningful choice—whether you’re supporting a cause close to your heart or helping family. Your unique tax circumstances will shape the best approach, and we’re here to help analyze your options. We assist clients in setting up donor-advised funds, exploring charitable contributions and planning family gifting strategies. Thoughtful giving not only reduces concentrated holdings but also strengthens the legacy of generosity. (Read Giving With Warm Hands for more.)
2. Options overlay. We use options overlay strategies to balance risk and reduce your tax burden while maintaining exposure to your holdings. Protective puts guard against extreme losses, covered calls generate income to offset taxes, and collars manage volatility while limiting downside.
3. Diversification strategies. Direct indexing and exchange funds (not to be mistaken for exchange-traded funds) help manage concentrated stock positions while minimizing tax consequences. These tools allow investors to spread risk and avoid liquidating core holdings at once—something that could trigger a taxable event.

   You may also consider selectively trimming a portion of the position. This can be a smart way to balance risk and optimize long-term returns, particularly for those in the 15% capital gains bracket (income up to $500,000).

4. Succession planning. Grantor retained annuity trusts, or GRATS, are a more sophisticated solution that can work well for certain investors. These trusts fell out of favor as interest rates climbed, but when interest rates drop again, they may be worth another look, as lower interest rates boost their effectiveness. They can minimize estate taxes when transferring wealth to family members. By placing assets into a GRAT, the grantor freezes their value, removing future appreciation from their estate and passing it to heirs tax-efficiently. Concentrated positions make strong candidates for seeding a GRAT.

Managing concentration risk isn’t about moving away from success; it’s about securing it. If you want to explore any of these strategies as they relate to larger positions in your portfolio, or if you think they could help with your long-term goals, speak with your advisor.