When one stock makes up a large share of your wealth, your financial future often rides on a single company. This position may come from founding a business, years of equity compensation, early-employee shares, or a long-held or inherited stock that grew over decades. Regardless of origin, it often represents both success and exposure.
History offers many reminders that even well-known, well-run companies can stumble. A disappointing earnings report, a new competitor, a regulatory change, or a shift in an entire industry can cut a single stock's value sharply, sometimes permanently.
Concentration also carries quieter risks. Your paycheck and portfolio may depend on the same company. Your wealth may be harder to turn into cash when you need it. And the longer a position sits unplanned, the more emotional attachment and tax friction can make it difficult to act at all.
The obvious fix is to sell the position and spread the proceeds across many investments. The catch is taxes. If your cost basis is low, selling can trigger a large capital gains bill, shrinking the capital you want to keep working. Many people hold on simply because selling feels too expensive.
Selling everything at once is not the only option. A thoughtful plan can balance three goals that often pull against each other:
The four approaches below are widely used tools for striking that balance. Each involves trade-offs and its own risks, but understanding the options can help plan for your future.
With direct indexing, you own some or all of the individual stocks in an index (such as the S&P 500) in your own account rather than through a fund. Given the large number of companies in an index, your manager can sell holdings that have dropped in value to "harvest" tax losses, often even when the overall index is positive, then replace them with similar holdings.
Those losses can help offset gains as you sell the concentrated stock in stages, for example a quarter of it each year over four years. Over time, the single stock shrinks and a diversified portfolio grows. You can also exclude your company and its competitors from the possible trades.
Options are contracts that let you reshape your stock's risk while you keep the shares, dividends, and voting rights.
A prepaid variable forward (PVF) is a private contract with a bank that pairs a collar with a cash advance. You pledge your shares and receive a large portion of their value up front. At the end of the term, typically between one and three years, you settle in shares or cash, or roll into a new contract. You are protected below the floor, there are no margin calls, and, when properly structured, taxes may be deferred until settlement.
An exchange fund is a private partnership where many investors contribute their own concentrated stocks. In return, each receives a share of the combined, diversified pool. Given that contributing is not a sale, it generally does not trigger capital gains tax today. The gain is deferred, not eliminated: your original cost basis carries over to your fund interest.
A few rules shape how these funds work:
After seven years, you can usually redeem your shares for a basket of the fund's stocks, generally without a tax bill until you sell them. If held until death, heirs may receive a step-up in cost basis.
What strategy is best for an investor depends on varying factors: How much of your wealth is in this stock? Do you need cash, protection, or both? How long can you wait? Are you a company insider?
Good planning starts early and looks at the full picture:
Each of these strategies comes with its own potential benefits, trade-offs, costs, and risks. It is important to review the details of any approach with your advisor, along with your tax and legal professionals, in the context of your full financial situation and goals.
A concentrated position normally takes years to build. Protecting it deserves the same care. We welcome the chance to review your situation, discuss which approaches may fit your goals, and help you build a plan.
GatePass Capital, LLC is a registered investment adviser; registration does not imply a certain level of skill or training. We also provide paid tax return preparation services through GatePass Tax Services, LLC and will not use or disclose your tax return information for non‑tax purposes without your written consent, as required by law (IRC §7216/§6713).
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