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Concentrated Stock

Today the top five S&P 500 companies — Apple, Amazon.com, Google, Microsoft and Facebook — combined are worth $4.095 trillion versus $4.092 trillion for the bottom 282 companies.

While this might seem mind-boggling, this sort of concentration is normal. In 1965, AT&T Inc. and General Motors Co. alone represented 14.5% of the S&P 500. What is different today, however, is that all the big players are tech names.

The gains have been extraordinary over the past five years, with Facebook, Apple, Amazon, Microsoft and Google growing from $1.2 trillion to over $4 trillion. For many of our clients that have been granted Restricted Stock Units in these companies, which have now settled into shares, a new financial planning challenge has been created, managing concentrated stock risk.

Concentrated stock risk is basically when you have a large holding of your “eggs” in one basket. There are many ways one can subject themselves to concentrated stock risk, but the most common occurrence we see at Alison Wealth Management is that employees are granted Restricted Stock Units, at vesting they surrender a portion of their RSUs to cover ordinary income tax, and then they hold the remaining shares in their taxable brokerage account. These employees receive new grants each year based on job performance, and each year more and more of their RSUs vest, settle into shares, and pile into the taxable brokerage account creating larger and larger positions. Compound the stock piling along with the substantial growth in the value of the stock, employees of these companies easily get pinned into concentrated stock positions.

The Good News: Over the last 5 years you probably made a lot of money by not selling all your shares at time of vesting to diversify.

The Bad News: Your overall financial well-being could be in jeopardy if your concentrated positions take a turn south.

Many of our client’s understand the risk of holding concentrated stock, and it is a serious risk (serious enough that the Financial Industry Regulatory Authority produced an advanced investor article for investors on concentration risk), but they don’t know what their options are to help ease the issue. 

More often than not, we see clients in which their stock position has been held for greater than one year. This means that if this stock was sold today in order to diversify, it would be subject to long-term capital gains. The top Federal long-term capital gains rate is currently 20%, in addition to a 3.8% net investment income tax. In addition, if your residence is California, you could be subject to additional state income tax of up to 13.3%. This tax creates an anchoring issue for individuals, they don’t want to pay up to 37.1% of their gain to taxes in order to diversify. They believe that their company’s value is going to continue to rise (and lately they have been rewarded for this), but one thing we have learned through history is no company is invincible, just look at Enron and Lehman Brothers.

While biting the bullet and selling your shares is certainly one option, there might be better strategies to help avoid unnecessary taxes.

Some of the unique strategies available to clients are:

  • Sell the shares outright & stop buying new shares
  • Retirement plan fund management (ensure concentrated stock isn’t being purchased unknowingly in underlying mutual funds and ETFs)
  • Bracket bumping capital gains tax management
  • Charitable giving
  • Protective put or costless collar options
  • Tax bracket arbitrage through family giving
  • Basis step-up estate planning

To illustrate these strategies in action, we wrote a white paper as a fable about hypothetical individuals and how they have deployed these 7 strategies. To hear their stories, click here.

FINRA Source: http://www.finra.org/investors/concentrate-concentration-risk

Image Source: https://www.marketwatch.com/story/this-1-chart-puts-mega-techs-trillions-of-market-value-into-eye-popping-perspective-2018-07-18

*Alison Wealth Management & Prosperity Capital Advisors do not offer protective puts & cashless collar options.


(650) 617-3402