FYR: Concentrated Position
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.
Share this course: vectorwealth.com/posts/fyr-concentrated-positionTraditionally, 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.
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.
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.
Time (minutes) … Chapter
00:28 … Define Concentrated Position
00:59 … How'd you get here?
02:37 … Risks in Concentration
03:44 … Taxes!
05:03 … Charitable & DAF
05:50 … Multi-year Disposition
06:56 … Company Market Cap
08:21 … Stock Lots
10:42 … Behavioral Attachment
12:20 … You may have options
12:55 … Tax Thresholds
13:49 … Multi-year Tax Planning
14:34 … Stacking Stock
16:34 … Time & Understanding
17:20 … Vector Services
17:26 … Regulatory