3 steps for managing concentrated risk in your portfolio

It may be tempting to concentrate your portfolio on a high-flying stock or two, especially if it’s your company’s stock you’re holding. However, managing the risk of stock concentration may offer more stability.

Tags: Investment strategies, Article, Investing, Stocks, Portfolio management
Published: February 05, 2020

If you’re an executive with a heavy concentration of your company’s stock, you may feel quite confident in your company’s future. Or, if you’re an investor whose concentrated portfolio has experienced outsized gains relative to the S&P 500, you may be satisfied with your current strategy.  

From 2003 to 2013, 92 percent of individual S&P 500 stocks experienced volatility greater than the S&P 500 index as a whole.1 Moreover, 11 percent of those stocks lost more than half their value during that period. In other words, while you may currently be doing well with a concentrated portfolio, the danger of a substantial drop is real.

“Having a large position of any one stock in your portfolio is risky,” says Robert Haworth, CFA, senior vice president and senior investment strategy director for U.S. Bank Wealth Management. “No one knows the future.”  

Even blue chips get the blues

“A surprisingly high percentage of large blue-chip companies frequently experience large stock price declines,” says Bill Merz, CFA, senior vice president and senior portfolio strategist for U.S. Bank.

There’s a 41 to 50 percent chance that a portfolio consisting of a single stock will fall 25 percent or more in a given five-year period, compared with a 13 percent probability for a diversified portfolio1.

Fortunately, you can mitigate the risk of a concentrated stock portfolio slowly and methodically. “You want to pay attention to how you exit a stock, what the risks are and what you're trying to accomplish,” Haworth says.


Following are three strategies that may reduce the risk in a concentrated portfolio, as well as potentially reduce asset risk or tax penalties.

1. Minimize your portfolio risk by hedging your holdings

If you want to keep your concentration intact, consider strategies that use option contracts, which may help reduce your downside portfolio risk. Also, by holding your concentrated shares, you may avoid the potential capital gains tax liability that could result from selling.

The cost? You may have to pay out of pocket to buy the options, limit the potential price appreciation of your shares over a predetermined amount of time, or both. Depending on the circumstances, there may also be tax considerations.

2. Slowly liquidate your shares

Selling your shares over time will help diversify your portfolio while helping to minimize risk and tax liability. Consider covered calls, which entail selling call options at a strike price higher than the stock is currently trading. It may be an effective way to generate incremental income along the way. If the stock falls or is flat by the time the call expires, you keep the premium. If the stock rises, you limit your upside.

“Covered calls have the effect of capping potential appreciation for your stock for a certain time period in exchange for receiving specific upfront cash flow,” Haworth says.

3. Create a charitable remainder trust

Moving some of the stock into a charitable remainder trust and naming yourself as the beneficiary may lessen concentrated risk while helping fulfill your charitable goals.

“You can get the benefit of immediate charitable deductions and a future income stream from the asset, which will ultimately go to charity,” Haworth says. But a charitable remainder trust is irrevocable, so it cannot be changed once funded.

These are just a few of the strategies that can help you diversify a concentrated and potentially risky portfolio. Talk with a financial professional to figure out how to position the concentration as part of your short- and long-term financial planning. If you have your own company’s stock, you’ll need to understand potential company restrictions on selling stock or hedging, and the tax implications.  

“Every situation is unique and requires a detailed analysis of a number of factors,” Merz says.  


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1 Concentrated Stock Portfolios. Cambridge Associates, LLC.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Options involve substantial risk and are not suitable for all investors. Prior to buying or selling an option, investors must receive a copy of "Characteristics and Risks of Standardized Options." Copies of this document may be obtained from an investment professional, from any exchange on which options are traded, or by contacting The Options Clearing Corporation at One North Wacker Drive, Suite 500, Chicago, IL 60606 (phone: 1-800-678-4667).