How Can You Diversify $10 Million in One Stock?

Holding $10 million in one company’s stock can create tremendous wealth, and a difficult financial decision.

You may understand that having such a large portion of your net worth connected to one company creates concentration risk. However, selling millions of dollars of appreciated stock at once could also result in a significant capital-gains tax obligation.

The decision is therefore not simply whether to hold or sell.

The more useful question is: How can you reduce concentration risk, manage the potential tax impact, maintain sufficient liquidity, and still participate in some of the stock’s possible future growth?

What is concentration risk?

Concentration risk occurs when one investment represents a substantial portion of an investor’s portfolio or overall net worth.

A concentrated position may develop through:

• Founding or selling a business
• Executive stock compensation
• Restricted stock or stock options
• An inheritance
• Years of strong company performance
• Long-term employment with one organization

The stock may have been responsible for creating significant wealth. However, continuing to hold it may leave the investor’s financial future dependent on the performance of one company, industry, or management team.

Why not sell the entire position immediately?

Selling the entire position may reduce concentration risk, but it could introduce other considerations.

If the stock has appreciated substantially, selling it may create a large taxable capital gain. The tax is generally based on the difference between the shares’ cost basis and sale price, subject to applicable federal and state tax rules.

A large sale could also:

• Increase taxable income during that year
• Affect other tax-planning strategies
• Eliminate participation in potential future appreciation
• Create decisions about how and when to reinvest the proceeds
• Produce emotional regret if the stock continues rising
• Conflict with trading restrictions for executives or insiders

These concerns do not necessarily mean the stock should continue to be held. They illustrate why a carefully coordinated strategy may be more appropriate than an all-or-nothing decision.

What strategies may help address concentrated stock?

The appropriate strategy depends on the investor’s goals, cost basis, tax situation, liquidity needs, charitable intentions, and any restrictions on selling.

Possible considerations may include:

1. Selling shares gradually

A multiyear sales plan may reduce the position over time rather than through one transaction.

Staged sales may allow the investor to coordinate realized gains with income, tax brackets, retirement, business events, and other financial decisions.

2. Coordinating gains and losses

In some circumstances, investment losses elsewhere in the portfolio may help offset a portion of realized capital gains.

Tax-loss harvesting involves specific tax rules and should be coordinated with qualified financial and tax professionals.

3. Directing new investments away from the company

Cash flow, bonuses, dividends, and new savings may be invested in other assets rather than adding further exposure to the concentrated position.

This approach may gradually improve diversification, although it may not reduce a particularly large position quickly.

4. Incorporating charitable giving

An investor with charitable intentions may consider donating appreciated shares directly to an eligible charity or through an appropriate charitable-planning vehicle.

Potential strategies may include a donor-advised fund or, in certain circumstances, a charitable remainder trust. Each option involves different tax, legal, income, and charitable considerations.

5. Exploring specialized diversification strategies

Certain qualified investors may consider exchange funds, hedging strategies, or other tools designed for concentrated stock.

These strategies can involve fees, restrictions, illiquidity, counterparty risk, complex tax treatment, and limitations on future appreciation. They are not appropriate for every investor.

6. Establishing a structured trading plan

Company executives and insiders may face trading windows, securities regulations, and company restrictions.

A properly established trading plan may help create a disciplined process for selling shares over time. Securities counsel and other qualified professionals should be involved when applicable.

How much of the position should you sell?

There is no single concentration percentage or sales target appropriate for every investor.

The decision may depend on:

• The investor’s total net worth
• Annual lifestyle expenses
• Upcoming tax obligations
• Retirement timing
• Other income sources
• Portfolio liquidity
• Confidence in the company
• Risk tolerance and capacity
• Family and estate-planning goals
• The desire to retain potential upside

Scenario planning can help illustrate how different sales amounts, tax outcomes, and future stock prices could affect the overall financial plan.

What should you ask before selling?

Before taking action, consider asking:

• What percentage of my wealth is tied to this company?
• What is my cost basis?
• What federal and state taxes could a sale create?
• How much liquidity do I need?
• What would happen if the stock declined significantly?
• How much potential upside am I comfortable giving up?
• Do I have charitable or estate-planning goals?
• Am I subject to trading restrictions?
• How will the proceeds be reinvested?
• Can the position be reduced through a staged strategy?

The objective is not necessarily to sell everything or preserve the entire position. It is to determine which combination of strategies best supports the investor’s complete financial picture.

Aventura Private Wealth helps executives, founders, business owners, individuals, and families evaluate concentrated wealth within the context of their investments, taxes, liquidity, risk exposure, and long-term goals. Before selling a substantial position, understanding the available options may help create a more coordinated and intentional strategy.

Aventura Private Wealth, LLC (“APW”) is a Registered Investment Adviser ("RIA"). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. APW renders individualized investment advice to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. Past performance is not indicative of future results.