As financial advisors in Cupertino, CA, Everest strives to provide guidance and education on wealth management matters. We hope this article sheds some light on your questions and concerns.

It is common for busy professionals to accumulate significant amounts of individual stocks in their investment accounts, either through their employers or through direct purchase. Over time, such holdings can become a big percentage of a family’s household wealth. Investors may have a reluctance to selling individual stock for many reasons:

  1. Potential for higher returns: If an individual stock performs well, one extrapolates that it will continue to outperform.
  2. Tax impact: Stocks accumulated at a low-cost basis pose a hurdle for the investor, due to the associated tax impact of selling and diversifying.
  3. Emotional attachment: Some investors may have a personal or emotional attachment to a particular company and fail to assess its investment merit on a continued basis.
  4. Too much company knowledge: As a current (or former) employee, one tends to develop a deep understanding of a particular company or an industry segment, and wrongly associate their product or competitive knowledge to better investment outcomes.
  5. Too busy: As simple as that.

Heavy concentration in one or a few stocks increases the risk of losses if the stock performs poorly or experiences a significant downturn. This risk is amplified if the investor is not well diversified across the entire household wealth.

  1. Taking on idiosyncratic risk: Concentrating a portfolio in a single stock means that the investor is now exposed to the idiosyncratic risks of a single company losing its competitive advantage. There are many examples (1) of individual stocks during the 2000-2002 dot-com bust or the 2008-2009 global financial crisis that lost more than 90% of their value (2) from their highs and never recovered since.
  2. Missed opportunities: Investors who are heavily invested in a particular stock may become overconfident in its prospects and fail to consider superior investment alternatives. This misplaced bullishness may lead to missed opportunities and lower overall returns.

Here at Everest, we strongly encourage viewing individual stock concentration as a percentage of the overall household balance sheet. A good rule of thumb is not to let overall the concentrated stock percentage be more than 20% of the overall family’s wealth. One or more of the strategies below can be suitable, and it can be to the investor’s advantage to closely work with their financial advisor to execute the right strategy.

  1. Tax-aware selling: Match lots with losses to lots with gains to sell in a tax-neutral manner, taking into consideration different short-term and long-term capital gains tax rates, and the family’s tax bracket. Proceeds from the sale can be invested into a broad-based index, without having to worry about writing that additional check to the IRS cometh April 15th.
  2. Separately Managed Account (SMA): Tender appreciated individual stocks, and have a custom portfolio built to replicate a broad-based index, such as the Russell 3000 or the S&P 500. This technique often requires additional cash contributions or paying a small tax penalty for trimming concentrated holdings toward the index completion process.
  3. Exchange Fund: Tender appreciated Blue Chip company stock in exchange for a broad-based portfolio that is managed to a target index, such as the Russell 3000 or the S&P 500. Liquidity constraints apply.
  4. Qualified Opportunity Zone (QOZ) Fund: Sell stocks or individual lots with capital gains and get federal tax credits. Proceeds from the sale require investing in an IRS-approved QOZ real estate development project within 180 days. Liquidity constraints will apply since the QOZ fund will require to be held for a minimum period of 10 years to qualify for the IRS tax credits.
  5. Charitable giving: Use structures like a donor-advised fund (DAF) and get IRS approved tax credits for donating stocks to charity. Once the stock is transferred to the DAF account, the investor can diversify into a broad-based portfolio such as an index fund, without incurring a tax impact. Donors get a deduction in taxable income equal to the fair market value of the donated stock. To maximize tax benefits further, it is prudent to donate stock lots with the lowest cost basis. Investors can pick the charity anytime during their lifetime and allow the DAF account to be managed as part of the household portfolio. 

Are You Ready to Diversify?

Like most financial concepts, divestiture of concentrated stock is multi-dimensional and intricate—especially for high-net-worth families. No matter what options you are considering, it’s important to work with a wealth advisor and a qualified tax professional before making any decisions. We would be happy to learn more about your unique situation and help you navigate the concentrated stock divestiture. Schedule an introductory, no-obligation meeting by contacting us at 408-502-6015 or emc@everest-mgmt.com.

About Ranga

Ranga Srinivasan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. After graduating from the University of Cincinnati in the field of engineering, Ranga, witnessed the dot-com collapse in the early 2000s and sought to manage his own personal finances. He realized that many of the options available were unsatisfactory for a myriad of reasons. Knowing it could be done better, Everest was founded in 2007 to provide comprehensive wealth management. Ranga and the Everest team are dedicated to caring for the financial needs of the families they serve. With an emphasis on building trust and holding to the fiduciary standard of putting clients first, Ranga strives to offer financial solutions that inspire confidence.

In his free time, Ranga is passionate about staying active; you can often find him swimming, golfing, biking, and playing tennis. He also has a great love for charity and philanthropy work. To learn more about Ranga, connect with him on LinkedIn.

About Ramprasad

Ramprasad Satagopan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. As a self-made, highly educated first-generation immigrant, Ramprasad became passionate about investing after witnessing the dot-com collapse in the early 2000s. He created Everest to help his peer engineering community to build household wealth in a systematic way. Everest has grown over the years, while staying true to its fiduciary commitment. Ramprasad and the Everest team take pride in being a firm that brings a reputable, honest, and caring approach to all its clients.

Ramprasad graduated from both the University of Cincinnati and the University of Phoenix with a master’s degree in science and business administration, respectively. When he’s not helping families build a strong financial future, Ramprasad can be found enjoying traveling and reading. To learn more about Ramprasad, connect with him on LinkedIn.

Everest Management Corp. is a registered investment advisor. The content herein is provided for informational and educational purposes only and is not intended to be personalized investment advice nor a recommendation to buy or sell any particular security. Everest renders investment advice to each client after gaining a full understanding of the client’s unique situation. Please contact us for additional information and risks associated with investing.

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(1) https://www.barrons.com/articles/asia-policy-us-china-trade-cc34bc0

(2) https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp