When One Stock Becomes ‘the Plan’

If a single stock has come to define your wealth, you’re not alone. After years of strong gains led by a small group of mega-cap companies, some investors now find that a significant portion of their net worth is tied to just one stock. That can feel exciting when the stock is rising, but it also means your financial future may be closely linked to one company’s performance. Put simply, when a material slice of your investable assets is held in a single security (or a few), you have concentration risk, meaning your outcomes may hinge on what that company does next, whether positive or negative.

This isn’t a theoretical concern. Long-horizon studies indicate that while a few stocks become long-term outperformers, most individual stocks underperform diversified indexes, and many experience deep and sometimes prolonged drawdowns.

For example, research found that, over the four decades from 1980 through 2020, roughly 66% of single stocks underperformed their broad benchmark and about 42% delivered negative returns. So-called catastrophic drawdowns (a 70% decline from peak value without a full recovery) were not uncommon. Another study highlighted that leadership from the Magnificent Seven, while influential, doesn’t typically continue in a straight line. Single-stock portfolios have historically shown steeper drawdowns and longer recovery periods than diversified indexes.

Why Is This Risk More Common Now?

Two forces have converged to make concentrated stock risk a more common issue:

1. Market leadership has been unusually narrow. A small number of mega caps have driven a significant share of index returns in recent years, concentrating gains for individuals heavily invested in them (e.g., NVDA, GOOG, MSFT).
2. Equity compensation has expanded and can compound concentration. Restricted stock units (RSUs), stock options, employee stock purchase plans (ESPPs) and performance shares can be effective in building wealth, but they also tether both income and assets to the same company. Some companies encourage (or even require) ownership levels that can further concentrate exposure.

Add in behavioral factors, which include familiarity with your employer, pride in a winning stock and reluctance to recognize gains, and it’s easy to see how someone might end up with 30%, 50% or even 70% of their investable assets in one position.

But here’s a reality check. Even strong companies can stumble, and single-stock drawdowns can be severe. Diversification doesn’t eliminate risk, but it can help shift exposure away from dependence on one company toward the broader engine of global markets.

The Problem and the Feelings Behind It

Here are some concerns we’ve heard from investors with concentrated positions:

• “I don’t want to sell and pay a big tax bill all at once.”
• “What if I diversify and miss more upside?”
• “My compensation and my portfolio are in the same stock. What if something happens at work and to the shares?”

The point about taxes shouldn’t be underestimated. Highly appreciated stock can carry large, embedded gains. But staying concentrated is a choice, and it can be a risky one. Long-run evidence suggests the odds of one stock continuing to beat the market are often lower than many assume, and the worst-case outcomes can derail your wealth.

A more helpful way to frame the decision might be:

“How can I gradually exchange single-company risk for market risk in a thoughtful, tax-aware way and on my terms?”

The High-Level Tool Kit We Use and How It Feels in Practice

As we discuss some of the solutions we employ at RWA, please remember that every situation is unique, tax rules are complex, and some strategies involve risks and eligibility requirements. This is intended to illustrate what’s possible and is not one-size-fits-all advice.

1. Direct indexing: Diversify while managing taxes along the way. Instead of selling everything at once, we can build a personalized portfolio that tracks a broad index while systematically harvesting losses in other positions. Those harvested losses can help offset gains as we trim the concentrated stock over time, aiming to keep your after‑tax results aligned with your goals.

   What this can look like:
   We set a glide path for how much concentration is reduced each quarter or year, aligned with your tax budget and comfort with tracking error. You stay invested in equities, but your future doesn’t hinge on a single ticker.

2. Long/short extension strategies: Accelerate diversification in taxable accounts. For clients with significant tax exposure, long/short strategies can create more opportunities to harvest losses without immediately selling the low-basis shares. The goal is to accelerate risk reduction while neutralizing some tax impact along the way.

   What this can look like:
   Think of it as adding a tailored “engine” around your current holdings, designed to generate offsetting losses during normal market moves. This lets you pare down the big position faster without an outsized tax bill in year one.

3. Option overlays: Protect the downside, sometimes fund the plan. Protective puts can define a floor under the stock for a period. Collars can cap some upside in exchange for downside protection at little or no net premium. Covered calls can generate income that may help fund diversification. Options-related strategies won’t remove risk, and they add complexity, but they can stabilize the journey as you transition.

   What this can look like:
   If your biggest fear is a sharp, sudden drop before you diversify, a collar can act like a seat belt: You’re still in the car, but you have more protection against a sudden, downward change in momentum.

4. Exchange funds: Diversify immediately, defer the tax bill. Qualified investors can contribute a single stock into a pooled fund and receive a diversified basket in return, but without an immediate sale. You defer recognition of gains until the diversified shares are sold later. It’s not for everyone (minimums and holding periods apply), but it can be a one-step path to broad exposure for very large positions.

   What this can look like:
   If your position is sizeable and you want to diversify quickly, this can be a powerful lever. It’s often combined with charitable strategies or direct indexing for the rest of the plan.

5. Charitable strategies: Align values, improve after‑tax outcomes. Donating appreciated shares to a donor-advised fund or charitable trust can eliminate capital gains on the gifted shares and generate a potential deduction, freeing up room to diversify the remainder. This lever pairs naturally with a family’s giving goals and the values-based approach we know resonates in many households.

   What this can look like:
   If you already give annually, front‑loading several years of gifting using appreciated stock can reduce concentration and support the causes you care about. And it can potentially lower your overall tax drag.

Identifying the Solution for You

Managing concentration is about protecting your success. You worked hard to build what you have. A plan that gradually trades single-company risk for broad market risk, on a timeline and tax budget that fit your life, can be a meaningful step for your portfolio.

Keep in mind the strategies we discussed can be powerful tools for helping to reduce your tax burden and preserve more of your wealth, but they are also quite complex and require careful oversight to be properly implemented.

If you’re wondering whether your stock has become too big a piece of the puzzle or you want to learn more about any of these strategies, talk to your RWA team. They can help you map a route that respects taxes, preserves flexibility and keeps your long-term goals front and center.