What to Do When Too Much of Your Net Worth Is in One Stock

When your company goes public, one stock can suddenly take up more space in your financial portfolio than you intended.

If the value of your company increases and your net worth increases along with it, you can feel rewarding that the decision to work for your company paid off. But it can also be the opposite, which makes one question very important: how much of your financial future do you want to tie to one stock?

“As humans, we’re very optimistic,” says Angela Moore, a certified financial planner at Orlando, Florida-based Fruitful. “Everybody looks at an IPO and thinks, ‘I could make so much money on this.’ But not everyone thinks about how much they could potentially lose.”

A balanced financial portfolio, with diversified holdings, is usually the answer here, but that doesn’t mean you have to sell all your company’s stock during the next trading period. Here’s how to plan how many company stocks make sense for your portfolio and what to do with the rest.

A concentrated stock position is when a few stocks, or even fewer, make up a large enough share of your portfolio that their performance can significantly affect your financial picture. This carries a lot of risk as the value of your portfolio changes depending on the company’s current valuation.

Instead, financial experts generally recommend a well-diversified portfolio that avoids overinvesting in one position. That way, if one investment declines, it doesn’t make up a large enough percentage of the portfolio to meaningfully drag the entire value down. The industry generally considers anything from as little as 5% to as much as 20% in a single stock to be excessive concentration ⁽⁰⁾

Owning shares in a company is not a cause for concern – it’s about the level of influence in the larger context of your finances.

“If I have $500,000 to my name and $250,000 of that is tied up in one company, that’s significant. It could change my whole financial picture,” Moore says. “But if my total net worth is $500,000 and I only have $10,000 tied up, then it’s like I can take a hit.”

She continues, “That’s the heart of a concentrated stock position. When you step back and look at it, are you willing to lose that money? If the answer is no, then that’s a problem.”

In some cases, as in the second example above, the answer may be yes.

“Let’s say I have someone who has done a great job of saving,” Moore continues, describing an example where a client may have a full emergency fund, diversified investments and no major purchases or needs, including a need for liquidity. And when they evaluate a company’s stock together, they determine that it is likely to rise significantly. In that case, choosing to invest more in the company’s stock makes sense.

“My job is to educate them about it,” says Moore. “This could blow up and you could get filthy rich or it could fail. I want them to know ahead of time and make an informed decision.”

To make that decision, look at your finances as a whole. This includes cash accounts, brokerage and retirement accounts, any other assets and debts you may have or expect to receive in the future, such as an inheritance or a large purchase.

And when it comes specifically capital of the companyassessing holding risk is only one part of the equation. The second is how taxes come into play for each type of equity you have. For example, to qualify for long-term capital gains treatment, shares from incentive stock options (ISOs) must be sold at least one year after exercise and two years after the original grant date. In addition, if you hold exercised ISO shares after the end of the tax year, this can be triggered alternative minimum tax (AMT). Here’s a deeper dive stock options and when to use them.

“Make sure you understand (the) vesting schedule, limited trading windows and how holding periods may affect you if the sale is treated as ordinary income or a capital gain,” Cassandra Rupp, senior wealth adviser at Vanguard, based in Plano, Texas, said in an email interview.

Moore recommends securing a sound financial footing before deciding where the company’s stock proceeds will go. These include a well-funded emergency fund, maxing out retirement accounts, and paying off high-interest debt.

When you reinvest money from your equity, Rupp believes it should be in line with long-term goals. “Reinvestment should support retirement, liquidity or legacy goals, not short-term market views. For most people, this means investing in a diverse mix of stocks and bonds, spread across sectors, geographies and asset classes. Avoid trading one concentrated position for another.”

Now that you know how much and what type of equity you have (and the taxes involved for each), a complete picture of your financial portfolio, and where you want your equity money to go, you can start building a plan around these pillars.

Sale according to plan. For most employees of public companies, sales of their stock typically occur around open trading periods. Once you have a more complete picture of your finances, Rupp says you’ll have a clearer idea of ​​how much of your net worth can reasonably stay in company stock, and you can plan ahead for open periods when you can sell company stock.

He also advises that the sale doesn’t have to happen all at once. “A gradual sale can reduce the timing risk and emotional stress that (can) prevent people from diversifying. Aim to be tax efficient, but weigh waiting to sell for better tax treatment against the risk of holding a concentration position longer.”

Rule 10b5-1 Plan. If you are an executive in your company or your role requires you to handle non-public information, any purchase or sale of company stock can be closely watched as insider trading. As a legal defense, you can set up a 10b5-1 plan. This allows you to sell stocks on a pre-set schedule, and is created before you have any material information.

Exchange of funds. These investment vehicles pool the concentrated equity positions of multiple investors, who then receive a partnership interest or share in an exchange-traded fund. There are requirements to participate in the fund and rules that must be followed after joining, most importantly participants must be at least seven years old before redemption for shares in the portfolio.

Donor-advised charitable giving and funds. If you have already planned to make a donation to charity, you can donate the money obtained from the sale of your shares or the securities themselves.

Gifting securities provides key tax benefits: “This approach has the dual benefit of reducing the employee’s future tax burden and potentially obtaining a tax deduction in the year the gift is made,” says Rupp. “This is one of the reasons why donor funds (DAFs) have become so popular over the last decade.” However, a DAF may require a larger donation upfront and once the money is in the fund, the DAF’s sponsoring organization has legal title to the money and you cannot claim it back (here is more about the mechanics of DAFs).

Opportunities to offset your capital gains. This could be over collection of tax losses in a taxable brokerage account, where you can sell investments at a loss to offset some of the profits earned by selling your company’s stock.

Direct indexing is one method of tax-loss harvesting, where you mimic a stock index by buying each individual stock contained within it up to a dollar amount that suits you, allowing you to sell certain stocks at a loss when needed to recoup your gains. According to Aaron Brickley, a San Mateo, Calif.-based certified financial planner at Brickley Wealth Management, this is how long/short separately managed accounts (SMA) work.

“In a long/short SMA, where leverage is involved, you go both long and short, which is when you sell and participate,” he explains. “If the stock market goes down, it goes up, it increases in value. But conversely, if the market goes up, they lose money. And that gives those managers who run those strategies more availability to make losses.”