A note from Jim Cannon, CEO of Dynamic Advisor Solutions: As geopolitical tensions escalate in the Middle East, investors are once again facing unsettling headlines. While every conflict carries its own complexities, markets have navigated wars and geopolitical shocks many times before.
Advisors remain in an invaluable role, helping clients stay the course through historical perspective, diversification, discipline and a focus on long-term goals. We’re grateful for the full confidence we have in the steady advice, thoughtful guidance and trusted counsel our partner advisors provide to their clients every day.
With that in mind, we’re continuing with this week’s scheduled Portfolio Perspectives, which explores strategies for managing concentrated positions and preserving wealth over time. We also encourage advisors to stay apprised of our regular Dynamic Market Updates, where CIO Kostya Etus, CFA®, provides timely market context and insights.
By Dynamic’s Asset Management Team
Download the 03.06.26 Dynamic Portfolio Perspectives for advisors’ use with clients
A concentrated stock position isn’t the result of poor planning; it’s the result of your client’s success.
Whether that success was a long career at a growing company, shares that have been passed down through generations, or founders’ equity that’s appreciated significantly. A single stock, or a small group of stocks, may now represent a disproportionately large percentage of total investable assets.
However, when 20% or more of a portfolio is tied to one company, the opportunity created by that success can also introduce meaningful risk. The key is not simply to reduce concentration but to do so thoughtfully, tax-efficiently and in alignment with long-term goals.
What Is a Concentrated Stock Portfolio?
A concentrated stock portfolio exists when a significant portion of an investor’s wealth is invested in one company or a handful of securities. In many cases, these positions also carry substantial unrealized capital gains.
This type of concentration often develops through:
- Inherited stock with a low-cost basis
- Restricted stock units (RSUs) or other equity compensation
- Founder or executive ownership
- Long-term appreciation of a single holding
While concentration can feel reassuring — especially when the company is familiar or personally meaningful — it can also introduce risks that are easy to underestimate.
The Risks of Concentration
The most obvious risk is single-company risk. If that company underperforms, faces regulatory pressure or experiences unexpected challenges, the impact on overall wealth can be significant. But concentration risk extends beyond company-specific headlines.
Individual stocks tend to be more volatile than diversified portfolios — meaning larger swings in value, both up and down. For executives and employees, there may also be correlation risk: income, benefits and investments may all be tied to the same organization.
There’s also opportunity cost. A portfolio heavily weighted toward one stock may miss out on growth opportunities across other sectors or asset classes. And for many investors, the tax implications create an additional challenge. Selling shares to diversify may trigger substantial capital gains taxes, making it difficult to act even when it’s financially prudent.
The result is often a feeling of being “stuck” between risk and taxes.
3 Ways to Diversify Concentrated Positions
The good news: Investors aren’t limited to an all-or-nothing decision. Here are three strategies that can help manage risk, improve diversification and potentially reduce the tax impact:
1. Direct Indexing
Direct indexing allows investors to replicate a benchmark, such as the S&P 500, by owning the individual stocks that make up the index rather than purchasing a mutual fund or ETF.
This structure provides greater flexibility. Because the underlying securities are owned directly, portfolios can be customized around existing concentrated positions. It also enables ongoing tax-loss harvesting, potentially generating tax savings that can help offset gains elsewhere in the portfolio.
Plus, the tax-loss harvesting from direct indexing can be used to sell down a concentrated stock over time.
For investors seeking diversification without sacrificing tax efficiency, direct indexing can be a powerful tool.
2. Option Overlay Strategies
Options can also be used to manage concentrated positions without immediately selling shares.
Protective put strategies may provide downside protection by establishing a price floor on a highly appreciated stock. Covered call strategies can generate income while reducing some exposure to further upside volatility.
Bonus: The protective put and covered call strategies can be combined to achieve the best of both worlds.
When thoughtfully implemented, option overlays can help investors manage risk, generate income and potentially defer capital gains, particularly in situations where preserving wealth is more important than maximizing additional upside.
3. Exchange Funds
For investors with long-time horizons who prioritize tax deferral, exchange funds offer another alternative.
In an exchange fund, investors contribute their concentrated stock to a pooled vehicle alongside other investors with their own concentrated positions. In return, they receive units of a diversified portfolio. After a required holding period, investors can exit the fund with a diversified basket of securities.
This approach allows for diversification without an immediate taxable event, though it requires patience and careful planning.
Turning Concentration into Opportunity
A concentrated position can be both a strength and a vulnerability. It often represents years of hard work, loyalty and success. But preserving that success requires moving from passive exposure to intentional strategy.
Managing concentration isn’t about abandoning a company you believe in. It’s about aligning clients’ portfolios with their broader financial goals: reducing uncompensated risk, improving diversification and being mindful of tax implications along the way.
At Dynamic, we work with advisors to evaluate their clients’ concentrated positions within the context of their entire financial picture. The right approach depends on time horizon, tax considerations, liquidity needs and risk tolerance. But with thoughtful planning and the right tools, concentration can shift from a source of anxiety to a well-managed component of long-term wealth strategy.
Invest with intention.
Let’s talk about how we can support your clients’ success.
Contact Dynamic’s Asset Management team at (877) 257-3840, ext. 4 or assetmanagement@dynamicadvisorsolutions.com.
Disclosures
For advisor use only. This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.
This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.
All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.
To the extent that this material concerns tax matters, it is not intended to be used by a taxpayer as tax advice. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.
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