The Threat of Concentrated Stock
When we talk with clients about risk, the conversation often starts with markets, volatility, rates, politics, all the usual suspects. But one of the most common risks we actually see in portfolios is much simpler: a single stock that has quietly grown into something much bigger than anyone intended. It usually starts innocently with founder stock, long tenure at a great company, equity compensation that worked exactly as hoped, or a great personal pick. Success, in other words.
The Challenge is What Happens Next
Over long periods of market history, the typical individual stock struggles to keep pace with the market as a whole. And stocks that have already had an exceptional run tend to face an even steeper climb going forward. Expectations rise, valuations stretch, and the margin for error gets very thin. One study showed that stocks that outperformed over the last five years, on average, underperformed the market by nearly 18% over the next 10 years. That does not mean the company is broken. Often, it is still a great business. The risk is that too much of a family’s financial future is tied to one outcome, one management team, or one set of industry dynamics.
Concentration has a way of sneaking up on people. It rarely feels reckless in the moment. In fact, it usually feels earned. The real risk shows up later, when a single position begins to drive not just returns, but stress, decision-making, and timing pressure. At that point, doing nothing becomes a decision in its own right.
This is Where Thoughtful Planning Matters
There is rarely a single right answer. Some clients retain, some sell, some endow it, and others exchange it for a more diversified portfolio, or even transform the return stream. The common thread is intention. Managing concentrated stock risk is less about predicting the next move in the stock, and more about aligning wealth with life. Diversifying is not about abandoning belief in a company. It is about protecting flexibility, preserving what has already been built, and giving future decisions more room to breathe. Great outcomes often create concentrated risk. Great planning is what turns those outcomes into durable wealth.
Conclusion
We specialize in helping families navigate concentrated wealth thoughtfully and deliberately. If you are wondering what your options might look like, reach out to your advisor. A good conversation now can prevent a harder one later.
Source: Eaton Vance and Antti Petajisto. Underperformance of Concentrated Stock Positions, October 2023. Data is derived from all US incorporated publicly traded common stocks in the Center for Research in Security Prices (CRSP) database from 1/1926 to 12/2022. The selected universe contains the largest 3,000 stocks based on market capitalization (on a monthly basis) that also are included in the largest stocks comprising 99.5% of the total US equity market capitalization. The selected universe is formed using the median market capitalization over the prior three months. If a stock is delisted during the investment horizon, the delisting return is included by subsequent relative returns are assumed to be zero. The median returns displayed are unmanaged. Diversification does not guarantee a profit or protect against loss in a declining financial market.
This content is for informational purposes only. The content does not purport to present a complete picture, but Focus Partners believes the information is representative of issues and needs facing some clients. This should not be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice.
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