There is a well-worn saying in our industry: Concentration builds wealth. Diversification preserves it.
If you are a founder or executive sitting on a massive, concentrated position in a single company’s stock, congratulations. You took a risk, you beat the odds, and you won. It is completely natural to feel a deep sense of loyalty to the stock that built your net worth. Behavioral economists call this “Familiarity Bias”; the psychological comfort of holding what we know.
But looking at the hard data, holding that single stock indefinitely is a massive statistical risk.
Researching the lifetime performance of thousands of stocks provides a brutal reality check for heavily concentrated portfolios:
- Over the long run, two-thirds of all individual stocks fail to keep pace with the broader market index.
- 40% of all stocks suffer a “catastrophic loss”; meaning they drop 70% or more from their peak and never recover.
- The median stock’s return since its inception, when compared to simply holding the index, is negative 54%.
- The statistical odds of your specific company being the rare “megawinner” that carries your portfolio for the next two decades are remarkably slim. [1]
We know you don’t want to sell your life’s work tomorrow and trigger a massive, immediate capital gains tax bill. The good news is that you don’t have to. We can use quantitative strategies to mathematically de-risk your position over time. Here are three ways we are helping clients do exactly that right now:
- Get Paid to Set an Exit Price (Writing Covered Calls)
If you are willing to sell a portion of your stock at a higher price in the future, we can write (sell) covered call options. In plain English: another investor pays you an upfront cash premium today for the right to buy your shares at a predetermined higher price later. You keep the premium no matter what. It’s a way to generate income from your concentration while systematically staging your exit.
- Engineer a “Floor and Ceiling” (Collars)
If you want to protect against a catastrophic drop but don’t want to pay heavily out-of-pocket for that “insurance,” we can build a Collar. We purchase a protective put (establishing a firm floor on your stock’s price) and finance it by selling a call option (capping your upside). From a statistical standpoint, this drastically narrows your range of potential outcomes.
- The Tax-Free Swap (Exchange Funds)
If you want immediate diversification without the immediate tax hit, you can contribute your shares into an Exchange Fund alongside other wealthy investors doing the same with their concentrated stocks. You instantly gain exposure to a broad, diversified basket of equities. After a seven-year holding period, you can walk away with that diversified portfolio—all without triggering the tax penalty of an outright open-market sale.
You don’t have to choose between keeping all your risk or paying all your taxes. Our integrated one team approach of tax, estate, and investment teams specialize in engineering these exact off-ramps.
Let’s look at the math together. Reach out to schedule a portfolio stress test.
