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 room in your financial portfolio than you intended.

If your company’s value increases, and your net worth alongside it, it can feel rewarding that the decision to work for your company paid off. But the opposite can also be true, making one question very important: How much of your financial future do you want tied to a single stock?

“As humans, we’re very optimistic,” says Angela Moore, a certified financial planner at Fruitful and based in Orlando, Florida. “Everyone looks at an IPO and thinks ‘I could make so much money off of this.’ But not everyone is thinking 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 shares during the next trading window. Here’s how to make a plan for how much company stock makes sense for your portfolio, and what to do with the rest.

A concentrated stock position is when a handful of stocks, or even less, make up a large enough share of your portfolio that their performance can meaningfully affect your financial picture. This carries a large risk because your portfolio’s value swings depending on the company’s current valuation.

Instead, financial experts generally recommend a well-diversified portfolio that avoids being overly invested in a single position. That way, if one investment declines, it doesn’t make up a large enough percentage of the portfolio to meaningfully drag the whole value down. The industry generally considers anywhere from as low as 5% to as high as 20% in a single stock to be an overconcentration [0]

Having company stock isn’t reason to be alarmed – it’s about the level of impact in the larger context of your finances.

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

She continues, “That’s the gist of a concentrated stock position. When you take a 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 an excellent job saving,” continues Moore, 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 evaluating the company stock together, they determine that there may be a probability that it goes up significantly. In that case, choosing to invest more in company stock makes sense.

“My job is to educate them on that front,” says Moore. “This could blow up and you could become filthy rich, or it could go to nothing. I want them to know ahead of time and make a conscious decision.”

To reach that decision, review your finances as a whole. That includes cash accounts, brokerage and retirement accounts, any other assets and debts you may hold or anticipate receiving in the future, such as an inheritance or major purchase.

And when it comes specifically to company equity, estimating the risk of holding is only one part of the equation. Another 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 exercising and two years after the original grant date. Additionally, if you hold onto exercised ISO shares beyond the tax year, this may trigger alternative minimum tax (AMT). Here’s a deeper dive into stock options, and when to exercise.

“Make sure you understand [the] vesting schedule, restricted trading windows, and how holding periods might affect you if sales are treated as ordinary income or capital gains,” says Cassandra Rupp, a senior wealth advisor at Vanguard, based in Plano, Texas, in an e-mail interview.

Moore recommends making sure a good financial foundation is in place before deciding where proceeds from company stock should go. That includes a well-funded emergency fund, maxing out retirement accounts and paying off any high-interest debt.

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

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

Selling on schedule. For most employees at public companies, selling their shares typically happens around open trading periods. Once you have a more complete idea of your finances, Rupp says that it’ll be clearer how much of your net worth can reasonably stay in company stock and you can plan ahead for open periods when you’re able to sell company stock.

She also advises that selling doesn’t have to happen all at once.“Gradual selling can reduce timing risk and the emotional stress that [can] stop 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 for longer.”

Rule 10b5-1 plan. If you’re an executive at your company, or your role requires handling materially nonpublic information, any buying or selling of company shares could be scrutinized as insider trading. As a legal defense, you can set up a 10b5-1 plan. This allows you to sell shares at a pre-set schedule, and is created before you hold any material information.

Exchange funds. These investment vehicles pool together concentrated stock positions of multiple investors, who are then given partnership interest or a share of the exchange fund. There are requirements to participate in a fund, and rules to follow once included, the most crucial being that participants must hold for at least seven years before redeeming for a share of the stocks in the portfolio.

Charitable giving and donor-advised funds. If you were already planning to make a donation to charity, you could donate cash generated from the sale of your shares or the securities themselves.

Gifting the securities provides key tax benefits: “This approach has the dual benefit of reducing an employee’s future tax burden and potentially receiving a tax deduction in the year the gift is made,” says Rupp. “This is one reason why donor-advised funds (DAF) have become so popular over the last decade.” However, a DAF may require a larger upfront donation and once the money is in the fund, the sponsoring organization of the DAF has legal ownership over the money and you can’t ask for it back (here’s more on the mechanics of DAFs).

Opportunities to offset your capital gains. This could be through tax loss harvesting in a taxable brokerage account, where you can sell investments at a loss in order to offset some of the gains earned by selling your company shares.

Direct indexing is one method of tax loss harvesting, where you mimic a stock market index by buying each individual stock contained within it up to the dollar amount that works for you, allowing you to sell certain stocks at a loss when necessary to offset your gains. According to Aaron Brickley, a certified financial planner based in San Mateo, California, at Brickley Wealth Management, this is how long/short separately managed accounts (SMAs) work.

“In a long/short SMA, where there’s leverage involved, you’re going 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, those shorts lose money. And it gives these managers that run these strategies more availability to generate losses.”