FYR: Concentrated Position

FYRPodcast

Aug 1

Written By Joe Grochowski

For Your Reference: Real-world financial planning scenarios discussed.

Key Take Aways

A concentrated position is when a single investment, often a stock, makes up more than 10 percent of a portfolio.
Concentration introduces a risk factor to the portfolio where the loss-of-value in a single position could materially impact the overall performance.
Selling a concentrated position may have tax consequences depending on the type of account where the investment is held.
Charitable contributions, multi-year disposition planning, and option strategies may be considered to lower potential tax burdens.
*Individual circumstances may vary.

Topic Links - FYR

Concentrated Position Basics
Charitable Giving & CP
Behavioral Perspective

Full Length Video

Concentrated Position Discussion

Joe Grochowski is a Senior Wealth Advisor at Vector.

Share this course: vectorwealth.com/posts/fyr-concentrated-position

What is a concentrated position?

Traditionally, that would be anytime there's at least 10% of a client's investable net worth in a single security. Now, based on circumstances, for example, if someone isn't going to be drawing down their assets in retirement and don't really need the wealth, maybe we would allow that concentrated position to be a little bit higher.

Charitable giving to reduce a concentrated position

Whether it's an outright gift to a single organization or perhaps the use of a donor-advised fund, a client is able to utilize at the time of making a gift, the fair market value of the stock. They can deduct up to 30% of their adjusted gross income the year that they make that donation.

A Behavioral Perspective

In our discussions with clients, we've often noticed that individuals tend to accumulate more shares over time, leading to concerns around concentrated stock positions. Frequently, if an investment strategy has been successful for an extended period, clients may question the need for change. However, it's crucial to remember that the distribution phase of investing differs considerably from the accumulation phase.

In particular, a longstanding successful strategy can sometimes foster a false sense of security, leading to an emotional attachment to a particular investment. As advisors, we play a role in challenging this perspective, reminding clients of the business risks associated with overexposure to a single stock.