The same investment that built your wealth can also threaten it. Learn how to systematically diversify a concentrated stock position while minimizing taxes, whether you’re an executive with vested options, sitting on a big stock winner, or holding inherited shares.
By Michael Christian, EverPar Advisors
Over the years, I’ve had many conversations that start with a version of the same story. A potential client comes in, and they’ve done well. Really well. Maybe they’ve been with their company for 15 years, and those stock options they received early on have vested and appreciated significantly. Or they bought shares of a company 20 years ago, and it turned out to be one of the big winners. Or they inherited a position from a parent or grandparent.
The details vary, but the core is the same: a single stock now represents 40%, 50%, sometimes even 70% of their net worth.
The paradox about concentrated positions is this: the same investment that built your wealth can also threaten it. You’re sitting on significant gains, which is fantastic. But you also have most of your eggs in one basket, and that creates real risk.
And then there’s the tax issue. When you’re looking at a position with millions of dollars in embedded capital gains, the idea of selling and triggering a massive tax bill can feel paralyzing. I get it. Nobody wants to write a check to the IRS for hundreds of thousands of dollars, or more.
Here’s what I’ve learned: the cost of inaction often exceeds the cost of taking action. The research bears this out. There’s roughly $1 trillion in concentrated stock held by U.S. investors right now.* And when you look at stocks that have suffered what we’d call catastrophic losses (a 50% peak-to-trough drop), nearly 40% of them never fully recovered.**
*Source: BlackRock, “Diversify concentrated stock with long/short” – https://www.blackrock.com/us/financial-professionals/insights/diversify-with-long-short
**Source: Morgan Stanley Wealth Management, “Diversify Concentrated Stock Positions: A Guide” – https://www.morganstanley.com/articles/diversify-risks-concentrated-positions
That’s the risk you’re taking by staying concentrated.
There are sophisticated, tax-efficient strategies to diversify over time. You don’t have to choose between paying massive taxes today or staying dangerously concentrated. There’s a middle path, and that’s what I want to walk through with you.
3 ways concentrated positions develop:
In my experience, concentrated stock positions really show up in three distinct ways. Each one has its own nuances, but they all share the same fundamental challenge: significant capital gains stand between you and diversification.
Scenario 1: Executive Compensation
The first way is through executive compensation packages. You receive restricted shares or stock options as part of your comp plan. These are awarded to you and then vest over time.
What I see with the executives we work with is that they often have large embedded gains in these positions, and understandably so. They’re intricately involved in the success of their company. They know the business inside and out. They’re bullish on the stock because they’re helping drive the results.
So there’s often some reluctance to sell. I understand that completely.
At the same time, these executives also appreciate and understand that this is a concentrated position. They recognize that they have a lot of non-systematic risk (company-specific risk) sitting in a single stock. They’re open to a systematic plan to reduce that position over time. They just want to do it in a way that makes sense and minimizes the tax hit.
The tax consequences here are primarily long-term capital gains. And that’s where we can put together some real strategies (see section below).
Scenario 2: Positions That Have Taken Off
The second scenario is simply positions that have had fantastic runs.
We have clients that have owned NVIDIA, Google, Microsoft, or Amazon. Over the last 20 years or so, these stocks have just crushed it. Incredible performance.
But now you’re sitting on a position that’s become 30%, 40%, 50% of your portfolio. And when you look at how elevated prices have become in what people call the MAG-7 or MAG-10 (the mega-cap tech stocks) or the hyperscalers, it raises the question: how do we start to reduce some of that risk?
You made a great investment. You held on to it. You were rewarded for that patience. But at a certain point, you need to think about portfolio construction and diversification, not just individual stock performance.
Scenario 3: Inherited Stock Positions
The third way concentrated positions develop is through inheritance.
This could be stock you received when you were young, or stock that’s held in a trust. Maybe it didn’t get a step-up in basis when it was transferred, or maybe you’ve just held it for an extremely long time.
I have a client with some industrial stock positions that have been held for 40 years. The cost basis in these positions is under a dollar per share. Under a dollar.
Now, these particular stocks have actually underperformed the market over time. They’re not technology-related, so they haven’t seen the same kind of growth we’ve seen in tech. But even though they’ve underperformed, they still have massive embedded capital gains.
So you’ve got this situation where you’re sitting on a position that’s not performing particularly well, but you still have all this tax liability if you sell. That’s frustrating.
The Common Thread
In all three of these scenarios, the challenge is the same. You have a concentrated position. You understand the risk. And you have significant capital gains taxes standing between where you are now and where you want to be: properly diversified.
The question is: how do you get from here to there in the most tax-efficient way possible?
That’s what we’re going to walk through.
Why concentration risk matters (and why people often stay concentrated anyway)
If you’re holding a concentrated stock position, you’re taking on significantly more risk than you would with a diversified portfolio.
When you own a single stock, you’re exposed to what we call non-systematic risk. This is risk that’s specific to that one company. A leadership change. A lawsuit. A product failure. A competitor that comes out of nowhere. Regulatory changes. Any number of things that can impact that specific business.
A single stock position also has much more volatility than a diversified portfolio. The swings are bigger. Your net worth can fluctuate dramatically based on factors that are often outside your control.
Even with these clear risks, smart, successful people often stay concentrated. I’ve seen the same patterns.
First, there’s the tax issue. When you’re looking at a massive capital gains bill, the pain feels immediate and real. The risk of staying concentrated feels theoretical and distant. That’s human nature.
Second, if you’re an executive, there’s often a sense of company loyalty. You believe in the business. You’re part of building it. Selling can feel like you’re betting against your own team.
Third, there’s emotional attachment. This stock has done well for you. It’s part of your success story. There’s a reluctance to let go of something that’s been so good to you.
And fourth, there’s recency bias. The stock has performed well recently, so it feels like it will continue to perform well. We tend to project recent performance into the future, even though we know intellectually that’s not how markets work.
I get all of this. These are real psychological hurdles.
But I tell clients, we’re not trying to time the market. We’re not saying the stock is going to tank tomorrow. What we’re saying is that the cost of staying concentrated can be much higher than the cost of diversifying and paying the taxes.
We can’t predict what direction any individual stock will move. But we can manage risk. And that’s really what this is about.
Tax-efficient diversification strategies
Strategy 1a: Direct Indexing and Building Your “Tax Loss Bank”
This is the foundation of what we do.
With direct indexing, instead of buying an S&P 500 index fund, we build a separately managed account that owns individual stocks. We’re essentially replicating the index at the individual stock level. So you still get broad market exposure, but you own the actual stocks.
The advantage here is significant. When you own individual stocks, you can harvest losses at the individual stock level.
Here’s a simple example. Let’s say you have a $100,000 concentrated stock position that you want to diversify out of. If you just sell it outright, you’re going to trigger capital gains taxes on that entire gain. But if we build a direct indexing portfolio, we can start harvesting losses from the individual stocks in that portfolio when they decline.
We call this building a “tax loss bank.” You’re accumulating capital losses that you can use to offset gains.
So we might harvest $20,000 in losses in year one from the direct indexing portfolio. Now we can sell $20,000 of your concentrated position, and those losses offset those gains. You’ve just diversified $20,000 without paying taxes on it.
We do this systematically, year after year. We model that we can harvest, on average, about 2-5% of portfolio value annually in losses*. Some years it’s more, some years it’s less. It depends on market conditions. But over time, this strategy allows us to transition from a concentrated position to a diversified portfolio in a very tax-efficient way.
*This loss harvesting approach is designed to generate meaningful tax benefits over time. Invesco’s Enhanced Tax-Optimized Large Cap Equity SMA, which employs systematic tax optimization techniques including long/short extensions, demonstrates the potential value of sophisticated tax management. Their strategy targets tax alpha of 3-4% annualized over the life of the account and has achieved tax alpha of 8.59% for the year ending December 31, 2025, and 8.41% annualized over three years (Source: Invesco Enhanced Tax-Optimized Large Cap Equity SMA – Update, December 2025). Tax alpha represents the performance enhancement from tax management strategies.
We also build what we call a “capital budget.” We might say, okay, based on what we’re harvesting and your overall tax situation, we can sell $100,000 of your concentrated stock this year. Then we do the same thing next year. And the year after that.
This isn’t a one-year process. We’re typically looking at something like 7 to 10 years for a full transition. But that’s actually a good thing, because we’re being systematic and disciplined. We’re not trying to time anything.
One more important point: when we build your direct indexing portfolio, we can exclude stocks and sectors where you’re already overweight.
Let’s say you work in technology and you have a concentrated position in a tech stock. We don’t want to buy more tech stocks in your diversified portfolio. That would just be reconcentrating. So we can exclude the entire technology sector from your index, or we can exclude specific companies. We’re building the portfolio around your existing holdings.
Strategy 1b: The 130/30 Strategy (For Enhanced Loss Harvesting)
Now, there’s an enhanced version of direct indexing that we use for some clients. It’s called a 130/30 strategy.
In a standard direct indexing portfolio, you’re 100% long in stocks. You own stocks, that’s it. With a 130/30, we’re using some leverage. We go 130% long and 30% short, which nets out to 100% equity exposure. You’re not increasing your market risk, you’re just using leverage to create additional opportunities.
This approach solves two important problems.
First, it prevents what I call “portfolio perfection.” With a long-only direct indexing strategy, over time, you harvest all the losses and you’re left with a portfolio that’s entirely capital gains. After 10 years, every stock is sitting on a gain. You have nothing left to harvest. With a 130/30, you’re constantly creating new positions that can generate losses. You always have tools available.
Second, a 130/30 can harvest losses in any market environment. In a long-only portfolio, you need stocks to go down to harvest losses. With a 130/30, you can harvest losses when stocks go up (from the short side) and when stocks go down (from the long side).
We use a 130/30 specifically. Some firms are getting more aggressive with 150/50 strategies or even 2-to-1 leverage. We don’t usually do that.
The reason comes down to costs and risk management. There’s a cost to leverage, and when markets get really volatile, sometimes the algorithms that run these strategies can start to break down. You can end up with tracking error. Things don’t work the way they’re supposed to.
We want to be prudent with leverage. A 130/30 can give us the benefits I just described, but it keeps the leverage manageable. We’re being thoughtful about the trade-offs.
Strategy 2: Donor-Advised Funds (A Strategy We Use A Lot)
If you have any charitable inclinations at all, donor-advised funds can be incredibly powerful. We use this strategy a lot with our clients.
Let’s say you normally give $10,000 a year to charity. Instead of giving $10,000 this year, $10,000 next year, and so on, you give $50,000 all at once to a donor-advised fund. That’s five years’ worth of giving, all in one year.
The benefit is substantial. You get a big tax deduction in the year you make that contribution.
If you contribute cash, you can deduct up to 60% of your adjusted gross income.* If you contribute appreciated stock, you can deduct up to 30% of your AGI.* If it’s a combination of cash and stock, you can deduct up to 50%.*
*Source: IRS Publication 526 and Fidelity Wealth Management, “5 Ways to Diversify Concentrated Positions” – https://www.fidelity.com/learning-center/wealth-management-insights/diversify-concentrated-positions
We call this a “bundling strategy.” You’re bundling multiple years of charitable giving into one year to maximize your tax reduction.
The beauty of a donor-advised fund is you don’t have to decide immediately where that money goes. You make the contribution, you get the tax deduction right away, but then you can recommend grants to charities over time. This year, next year, five years from now. There are very minimal requirements for how much you have to distribute each year (usually something like $50 depending on which custodian you use).
Most of our clients use their custodian’s donor-advised fund. That could be Schwab, Fidelity, whoever you’re working with. You can name the fund whatever you want, and you have complete flexibility in terms of when and where the grants go.
This is particularly valuable if you have a high-income year. Maybe you just sold a business, or you had an unusually large bonus. That’s a perfect time to make a large contribution to a donor-advised fund and offset some of that income.
And if you contribute appreciated stock instead of cash, you avoid paying capital gains on that stock. So you’re reducing your concentrated position, getting a tax deduction, and avoiding capital gains tax. That’s a triple benefit.
Strategy 3: Charitable Remainder Trusts (For Larger Charitable Goals)
If you have significant charitable intent and you want an income stream, a charitable remainder trust might make sense.
This is more complex than a donor-advised fund, so it’s not for everyone. But here’s how it works.
You make an irrevocable donation of your appreciated stock to a charitable trust. The trust then sells the stock tax-free and reinvests the proceeds. You receive an income stream from the trust for the rest of your life (or for a set period of years). When you pass away, whatever’s left in the trust goes to the charities you’ve designated.
You get an immediate charitable tax deduction when you set up the trust. The trust avoids capital gains when it sells the stock. And you get income for life.
An important consideration: once you set up a charitable remainder trust, it’s irrevocable. You can’t change your mind. And the remainder goes to charity, so this is more than just leaving assets to your heirs. You are combining charitable giving with income generation and tax efficiency.
Why True Diversification Requires Private Markets
When we’re helping a client diversify out of a concentrated position, we’re definitely thinking about reducing risk. But we’re also thinking about where to reallocate those assets. That’s where private markets come into the picture.
Private investments aren’t a direct strategy for managing concentrated stock positions. But they are tangentially related.
Our Investment Philosophy
At EverPar Advisors, we believe that public markets are efficient for the most part. It’s hard to consistently beat the market through stock picking or market timing. We’re not trying to do that.
But we also believe there’s still a lot of inefficiency on the private side. Private investments are an integral part of any well-constructed investment portfolio. They’re not an add-on or a nice-to-have. They’re fundamental to true diversification.
So when we’re diversifying you out of a concentrated public stock position, part of our allocation strategy includes exposure to private markets. We want to give you equity-like returns, but we want those returns to come from different sources that aren’t correlated one-to-one with the public stock market.
The Problem with Traditional 60/40 Portfolios
For decades, the traditional diversification strategy was a 60/40 portfolio: 60% stocks and 40% bonds. The idea was that when stocks went down, bonds would go up (or at least hold steady), providing balance.
That relationship has changed. The correlation between stocks and bonds has increased significantly in recent years.* We’ve seen periods where both stocks and bonds declined at the same time. The traditional diversification benefit has weakened.
*Source: Vanguard Research, “The stock/bond correlation: Increasing amid inflation” – https://www.nl.vanguard/content/dam/intl/europe/documents/en/the-stock-bond-correlation-eu-en-pro.pdf
There’s also another issue. The S&P 500 has become increasingly concentrated in mega-cap technology stocks. If you’re diversifying from a tech stock by buying an S&P 500 index fund, you may still have significant technology exposure. You haven’t really diversified as much as you think you have.
What Private Markets Offer
A statistic to consider: approximately 87% of companies with revenues exceeding $100 million are privately held.* When you limit yourself to public markets, you’re only accessing about 13% of the available opportunity set.
Apollo Academy, “Public Markets Are a Small Part of the Overall Economy” (Source: S&P Capital IQ). URL: https://www.apolloacademy.com/wp-content/uploads/2024/05/PublicMarketsAreASmallPartOfTheEconomy-051924_v2.pdf
Private markets offer several benefits that are particularly relevant when you’re diversifying away from concentrated positions.
First, private investments have different return drivers. Returns come from operational improvements, strategic growth initiatives, and value creation at the company level. They’re not driven by daily market sentiment or what’s happening with interest rates this week. That gives you true diversification in how your returns are generated.
Second, private investments historically have shown low correlation to public equity markets. When public markets go through tough periods, private investments often demonstrate more muted responses. We saw this during the Great Financial Crisis and again during the COVID-19 pandemic.* Private equity showed much smaller declines than public equities.
Institutional Investor, “Private Equity’s Resilience During Major Crises: a 25-Year Analysis”
Third, private investments are valued infrequently. That creates a smoothing effect. You’re not seeing daily price fluctuations. For long-term investors, this can actually reduce the emotional volatility of watching your portfolio.
The Additional Tax Benefit of Using Private Investments
Here’s something that often gets overlooked in these conversations: there’s an additional tax benefit to combining direct indexing with private investments.
We can’t control when an underlying manager in a private equity fund buys and sells companies or makes distributions. Those managers are making decisions based on their strategy, not your tax situation. Sometimes those sales generate taxable long-term capital gains.
The “tax loss bank” we’re building with the direct indexing strategy can be used to offset not just the gains from selling your concentrated stock, but also the gains generated by your private investment managers.
That’s additional value. You’re getting more benefit from the tax-loss harvesting than you would if you were only investing in public markets.
The EverPar Difference: A Team-Based Approach
When I think about how we handle concentrated stock positions at EverPar, what really differentiates us is our team-based approach. It’s fundamental to how we operate.
The reality is that managing a concentrated stock position effectively requires expertise in multiple areas. You need investment expertise to build the right portfolio. You need tax and financial planning expertise to optimize the strategy and coordinate with your overall financial picture. And you need responsiveness to adjust as circumstances change.
When you work with EverPar, you’re working with a team. I focus on the overall relationship and investment strategy. Courtney, our director of planning, brings tax expertise and financial planning depth. She’s been a CFO of a private company, so she understands complex financial situations. David leads our investment team and brings deep expertise in portfolio construction and private markets.
We’re bringing the best of planning and investment together to craft strategies that work for your specific situation.
A Hypothetical Example
Let me give you a hypothetical scenario to show how this comes together.
Imagine an executive with an $8 million position in company stock. That’s 60% of their net worth. They have approximately $7 million in embedded gains. They’re 52 years old, still working at the company, and they have strong charitable intentions.
Here’s how we might structure a strategy:
Years 1-2: We establish a systematic selling plan. Because they’re still at the company, we’re working within trading windows. We’re not trying to time anything. We might do quarterly sales during open windows. We begin funding a direct indexing account with the proceeds, and we exclude the technology sector since they’re already concentrated there. They make a $50,000 contribution to a donor-advised fund using the bundling strategy, which provides a meaningful tax deduction.
Years 3-5: As we build the tax loss bank through the direct indexing portfolio, we use those harvested losses to offset gains from selling more of the concentrated stock. We’re allocating the proceeds across multiple buckets: 45% stays in public equities through the direct indexing strategy, 30% goes into private equity and private credit for true diversification and non-correlated returns, and 25% goes into fixed income for stability.
Years 6-10: We continue the systematic approach. By the end of this period, the concentrated position has been reduced to about 15% of the portfolio. That’s still meaningful exposure to the company if they want to maintain that, but the risk level is completely different. The portfolio is now truly diversified across different asset classes, different return drivers, and different time horizons.
Throughout this entire process, we’re evaluating annually. We assess what tools we have available this year, how much we can harvest in losses, what the optimal amount to sell is, and whether there are any changes in the client’s situation that we need to account for.
That’s the team-based approach in action. It’s about sustained, coordinated effort over multiple years.
Your next steps: from concentration to confidence:
If there’s one thing I want you to take away from this article, it’s this: concentration may have built your wealth, but diversification protects it.
The three scenarios I described at the beginning (executive compensation, positions that have taken off, and inherited stock) all share the same fundamental challenge. You have significant wealth tied to a single stock, and you have significant tax consequences if you try to diversify. That tension keeps a lot of people stuck.
But you don’t have to stay stuck.
The systematic approach we’ve walked through here provides a path forward. Build your tax loss bank through direct indexing. Allocate into truly different investments, including private markets. Leverage charitable strategies if you’re philanthropically inclined. And work with a team that brings expertise in both planning and investments.
The key is that we’re not trying to time the market. We’re putting a plan in place and sticking to it. We’re making consistent progress year after year, regardless of what’s happening in the markets in any given month or quarter.
I’ve worked with enough clients through this process to know that it works. You go from having 60% or 70% of your net worth concentrated in a single stock to having a properly diversified portfolio with exposure across public equities, private investments, and fixed income. Your risk profile changes dramatically. Your sleep at night improves.
And you’ve done it in a tax-efficient way that minimizes the pain of the transition.
One final thought. The best time to put a diversification plan in place was probably yesterday. The second-best time is today. Markets are unpredictable. Company-specific events are unpredictable. What we can control is having a plan and executing on it systematically.
If you’re in one of these three situations (executive compensation, a position that’s appreciated significantly, or inherited stock), I’d welcome a conversation. We can evaluate your specific circumstances, look at what tools are available, and put together a systematic plan that makes sense for you.
That’s what we do. And we’ve been doing it for decades.
EverPar Advisors LLC (“EverPar”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where EverPar and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance shown is not indicative of future results, which could differ substantially.
Diversification does not ensure a profit or guarantee against loss.
Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.
An investment in the Private investments involves significant risks and is suitable only for those persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the Partnership will achieve its investment objective. An investment in the Partnership carries with it the inherent risks associated with the underlying investments. Each prospective Limited Partner should carefully review the Confidential Offering Memorandum and Limited Partnership Agreements before investing.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.