Escaping Concentrated Stock Positions

By Matthew McDaniel | Advisor

A few years back, we met with a couple who had accumulated around 80% of their net worth in one position. How did this happen? It resulted from more than 15 years of receiving company stock as a portion of their overall compensation.

They were approaching retirement, and this concentrated stock position was threatening their ability to retire–not because it was declining, but because it tied their retirement to the company’s fate.

As we assembled their complete financial picture, it was apparent by looking at the net worth page they had a unique type of risk profile. Thankfully, we established a 3-year plan that lowered their allocation from 80 to a much more manageable 15% while at the same time protecting them from an unnecessary tax liability.

If you find yourself in a position like this, urgency is appropriate, but knowing the best path to safety is equally important before rushing ahead. Every financial plan is unique, and the best path for you depends on your specific circumstances. That said, here are a few of the key questions to consider:

Tax Implications: Rushing to hit “sell” is rarely the best idea. Creating a gradual sell plan that manages your tax bracket for maximum efficiency is far better.

Target Zones: How do you know how much stock to sell? This will be heavily based on your overall portfolio value. As a starting point: here’s a helpful reference:

• Less than 5%: Regardless of your net worth, this is a healthy level of diversification.
• 5-10%: This is a cautionary zone. Volatility will be directly related to your overall net worth.
• 10-20%: At this stage, we are recommending a strategy to create a more diversified portfolio. Company turbulence or failure has a significant impact.
• More than 20%: These are less common, but we almost always make an urgent path for safer diversification.

You may want to revisit this question with your advisor if you have been storing up equity compensation for many years.

If you also happen to be within 10 years of your anticipated retirement, now is the time to make decisions. If something happens to that stock position later in your career, you may not have the earning years to accumulate those assets again.

We want to help you experience stability and peace in your retirement years, and this is one keyway we accomplish that. If that’s you, please reach out. We’d be honored to help.