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The Risk of Over Concentration: Managing Tax and Investment Risks


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Investing in your company's stock can be enticing, but it carries inherent risks. Over concentration, where a substantial portion of your portfolio is tied to a single company's stock, poses significant dangers. From tax and investment perspectives, managing over concentration becomes critical. In this blog we discuss the risks associated with over concentration and highlight the importance of maintaining diversification within your net worth. Additionally, we'll discuss the emotional attachment that can develop and strategies like tax loss harvesting and the 83(b) election to mitigate tax impacts.

When a significant portion of your net worth is tied to your company's stock, emotional attachment can develop. This emotional connection stems from your loyalty, pride, and confidence in the company you work for. However, this attachment can cloud your judgment and expose you to risks. Relying heavily on one stock makes your portfolio vulnerable to adverse events, such as market downturns, industry disruptions, or company-specific setbacks. By diversifying your holdings, you reduce the emotional impact of individual stock performance and mitigate potential losses.

Maintaining a diversified portfolio is crucial for managing risk. Diversification means spreading your investments across different asset classes, sectors, and geographic regions. By doing so, you decrease your exposure to any single investment and its associated risks. The 10% rule is often recommended, advising that any one holding, including company stock, should not exceed 10% of your overall net worth. Diversification helps to protect your portfolio from the unpredictable nature of individual stocks, providing stability and potentially enhancing long-term returns. By achieving a balanced portfolio, you can protect your wealth, reduce emotional bias, and pursue long-term financial goals.

Over concentration can have significant tax implications. Selling a large portion of concentrated holdings may trigger substantial capital gains taxes especially when you add in higher levels of income that trigger the NIIT tax along with 20% long-term capital gains tax rate. To mitigate these tax impacts, consider employing strategies like tax loss harvesting and the 83(b) election. Tax loss harvesting involves strategically selling losing positions to offset capital gains, thereby reducing your taxable income. This strategy can help minimize the overall tax liability associated with concentrated stock holdings.

The 83(b) election is particularly relevant for certain types of restricted stock grants or awards. By making this election, you include the stock's fair market value at the time of the grant in your taxable income. This upfront recognition of income can be advantageous if the stock appreciates significantly, as any future gains would be taxed as capital gains rather than ordinary income. Consulting with a tax professional or Private CFO is crucial to understand the eligibility and potential benefits of these strategies.

Over concentration in company stock exposes investors to significant tax and investment risks. Maintaining diversification and adhering to the 10% rule in your overall net worth are critical for managing these risks. Additionally, strategies like tax loss harvesting and the 83(b) election can help mitigate tax impacts. By striking a balance between emotional attachment and prudent financial decision-making, you can build a resilient portfolio that safeguards your wealth and supports long-term financial success.

If you would like to receive more information on making smart money moves for your future, be sure to contact us today!


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About the author

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Kurt Brucker

Vice President, Private CFO®

A native of Marietta, Kurt graduated from Kennesaw State University (KSU), Summa Cum Laude, with a BBA in Finance and a Coles Scholars minor (top 10 in the business school). Kurt used his experience in the business school to quickly transition and make an impact at oXYGen Financial. In 4 years Kurt has risen from intern all the way to Vice President & Private CFO®.

Kurt lives in Buckhead with his wife Megan and is very involved with the faith community including Passion City Church. He is a die-hard Atlanta sports fan and loves to play golf and meet new people. Kurt is a very driven and motivated individual with a passion for helping others see their dreams come true.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. Investor Disclosures: https://bit.ly/KF-Disclosures

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Background and qualification information is available at FINRA's BrokerCheck website.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. https://Bit.ly/KF-Disclosures

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