In brief, a concentrated stock position is any large accumulation of stock in one company, or an ETF for that matter, relative to the investor’s total wealth. Any time a large portion of an investor’s capital is tied up in one holding it presents risks to the overall portfolio as well as the investor’s long-term plan. The risks include diversification risk, tax consequences, and liquidity. Meanwhile, the investor may have one or more objectives for the shares and their inherent value over time, such as risk management, income, strategic exit, and/or charitable intentions.
While there is no widely-accepted definition of a concentrated position, at Swan Global Investments, we consider a concentrated stock position as any investment in one stock that represents 15%, or more, of the investor’s total investable assets.
Such situations might include:
- An employee who has received company stock as compensation
- An entrepreneur who sold his or her company and received equity of the acquiring firm
- A beneficiary who inherited a large position in a company
- An early investor in a company who has seen that position grow tremendously
In such cases, the investor might have 50%, 75%, or possibly even 90% of their wealth tied up in a single company. While it is likely that such an investor would be a high net worth individual, having too much of one’s wealth in a single holding exposes that investor to a large degree of stock-specific risk.