Top Strategies for Managing Concentrated Stock Positions in Your Investment Portfolio

By Patrick Wells, CFA.

Chances are that you ended up with a large position in a single stock for one of several reasons – shares granted by an employer, an inheritance, or just outperformance over time. Employers often use their shares as a form of compensation. Typically, these are high-quality companies with the promise of good returns over time; however, having a concentrated stock position can lead to issues in your portfolio. It’s a good problem to have, but one that often presents challenges.

Look no further than stalwarts like General Electric who have seen a fall from grace and near-elimination of the previously sacrosanct dividend. Others like IBM have seen a more gradual decline as they were outcompeted by more nimble competitors. Highly regulated industries like pharmaceuticals can see adverse decisions create more sudden problems.

You don’t have to expect a problem to prepare for it. While scenarios do not always unfold this way, these examples highlight the importance of managing concentrated positions into a more diversified portfolio. Here are some tips on how to approach the problem intelligently, without lowering your dividend income or being faced with a sudden, large tax bill.

• Make a Plan: Decide on a strategy to reduce exposure and stick to it. Reducing a position with a low-cost basis will result in taxes. There is no way around that. Aim to spread them over a reasonable time horizon by selling gradually and planning around any other taxable events in your life.

• Reduce Risk: Selling shares is the only way to truly reduce risk. Options strategies can offer limited benefits in this regard but at times can be expensive to implement. The urgency with which you should reduce the position will depend on the company’s prospects, the valuation of its shares, and your risk tolerance, among other factors.

• Balance the Portfolio: Don’t just diversify. Counterbalance. If you have a concentrated position in a technology stock trading at elevated valuations, consider countering it with banks that will benefit from higher rates. The purpose of this is to balance your risk, not necessarily to outperform an arbitrary benchmark. Take this into account across all of your financial assets.

• Build Dividend Income: Offset volatility in your portfolio by using the proceeds to build an income stream less susceptible to market fluctuations. Historically, this would involve building a portfolio of bonds. In today’s low-interest-rate environment, however, we rely more on quality dividend stocks. This portfolio should be diverse enough to insulate you from fluctuations at any one company but concentrated enough that you can monitor their fundamentals.

• Offset with Losses: Ideally you won’t have any losses in your portfolio, but that is seldom the case. You can offset a portion of your realized gains by harvesting tax losses in these other holdings. Roll that exposure into similar companies, assuming the investment thesis remains, to realize the loss but maintain a similar upside.

It’s never too early to begin thinking about a long-term plan, especially when you have concentrated, low-cost basis positions. In addition to stock fluctuations led by corporate events and the markets, there are ongoing legal and regulatory issues that need to be taken into consideration. For example, the government is increasingly eyeing higher capital gains tax rates to raise revenue. You never know what the future will hold, but you can prepare for it and plan accordingly.

This investment commentary is limited to the dissemination of information pertaining to Pinnacle Associates, Ltd. (“Pinnacle”) and general economic market conditions. Nothing contained herein should be construed as personalized advice, or an offer or solicitation to buy or sell any securities. Past performance is not indicative of future results, and there is no guarantee that the views and opinions expressed in this commentary will come to pass. Pinnacle is neither a law firm nor an accounting firm, and no portion of this commentary should be construed as legal or tax advice. You are advised to consult with separate legal or tax advisors with respect to any legal or tax advice. Pinnacle is an investment adviser registered with the SEC. For information pertaining to the registration status of Pinnacle, please refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Pinnacle, including fees and services, send for our written disclosure statement as set forth on Form ADV Part 2A.

About the author

Patrick Wells, CFA is an Associate Portfolio Manager and Securities Analyst at Pinnacle Associates. He works primarily with high-net-worth individuals and families to analyze the companies included in their portfolios and to tailor these investments to the circumstances of each client. Patrick applies his background in fundamental company research and his knowledge of a range of asset classes to inform these decisions.

For information, contact:

Patrick Wells, CFA

Pinnacle Associates, Ltd.

(212) 652-3254

[email protected]