Picture this: You've been working at a high-growth tech company for five years. Your RSUs have vested, your stock options are looking promising, and on paper, you're worth more than you ever imagined. But there's a catch—90% of your net worth is tied up in your company's stock.
Sound familiar? If so, you're dealing with concentration risk, and you're not alone.
What exactly is concentration risk?
Concentration risk occurs when too much of your wealth is invested in a single asset, company, or sector. While there's no magic number that defines "too much," financial advisors typically start raising eyebrows when any single investment represents more than 5-10% of your total portfolio.
For many professionals, especially those working at high-growth companies, concentration risk often stems from equity compensation. Between RSUs, stock options, ESPPs, and other stock-based incentives, it's surprisingly easy to find yourself with the majority of your wealth tied to your employer's stock price.
The double-edged sword of company stock
Here's the thing about concentration risk—it cuts both ways. That concentrated position might be exactly what built your wealth in the first place. Many of our clients have seen their net worth grow exponentially thanks to their company's stock performance.
But here's where it gets tricky. When your paycheck AND your investment portfolio depend on the same company, you're essentially putting all your eggs in one very expensive basket.
Consider what happened to employees at companies like Enron, Lehman Brothers, or more recently, Meta during its significant downturn in 2022. In these cases, employees who failed to diversify sufficiently from their company's stock were not only at risk of losing their jobs, but also of watching their retirement savings and investment portfolios crater.
The real-world impact: A client story (for illustrative purposes only)
Let's look at Sarah (name changed for privacy), a software engineer at a major tech company. When she first came to us, 85% of her $1.2 million net worth was in company stock. On the surface, this looked great—her company had been on a tear, and she'd made substantial gains.
But Sarah was planning to buy a house in the next two years and wanted to start a family. Her entire financial future hinged on her company's continued success. A single earnings miss, a major competitor gaining market share, or an economic downturn could derail all her plans.
Together, we developed a systematic plan to diversify her holdings over 18 months, taking advantage of tax-efficient strategies to minimize the impact. Today, her company stock represents about 20% of her portfolio—still a meaningful position that allows her to benefit from her company's success, but not so much that her entire financial future depends on it.
Why concentration risk feels so hard to address
If concentration risk is so dangerous, why don't more people address it? The psychology is complicated:
The familiarity trap: You know your company. You believe in its mission, its leadership, its products. It feels safer to stick with what you know than to venture into unfamiliar investments.
Tax paralysis: Selling appreciated company stock often means facing significant capital gains taxes. It's easy to postpone the decision, hoping for better tax treatment that may never come.
Golden handcuffs: Ongoing equity grants create a constant stream of new company stock, making it feel like you're swimming upstream when trying to diversify.
FOMO (Fear of Missing Out): What if you diversify and then your company stock doubles? The fear of missing out on future gains can be paralyzing.
Analysis paralysis: With so many investment options available, it's easy to get overwhelmed and do nothing.
The tax-smart approach to diversification
The key to addressing concentration risk isn't to dump all your company stock at once—that's rarely the optimal approach from either a tax or risk management perspective. Instead, the goal is to create a systematic plan that gradually reduces your concentration while minimizing tax implications.
Here are some strategies we commonly use with clients:
Systematic selling: Rather than making one large sale, spread transactions across multiple tax years. This can help manage your tax bracket and potentially take advantage of lower capital gains rates.
Tax-loss harvesting: If you have other investments showing losses, you can use these to offset gains from selling company stock.
Charitable giving: Donating appreciated shares directly to charity allows you to avoid capital gains tax while supporting causes you care about.
Strategic timing around life events: Major life changes like job transitions, marriage, or home purchases can create opportunities for tax-efficient diversification.
Roth conversions: In some cases, it may make sense to realize gains in lower-income years and convert traditional retirement accounts to Roth accounts.
Building a diversified portfolio that works for you
Once you've created a plan for reducing concentration risk, the next question is: where should that money go?
The answer depends on your goals, timeline, and risk tolerance. But generally, we focus on building a portfolio that includes:
Broad market exposure: Low-cost index funds that give you exposure to thousands of companies across different sectors and geographies.
Sector diversification: If you work in tech and your company stock is in tech, it often makes sense to diversify into other sectors like healthcare, financial services, or consumer goods.
International exposure: Don't limit yourself to U.S. markets. International diversification can provide both growth opportunities and additional risk reduction.
Fixed income: Bonds and other fixed-income investments can provide stability and regular income, especially important as you get closer to major financial goals.
Alternative investments: Depending on your situation, real estate investment trusts (REITs), commodities, or other alternatives might make sense.
When to seek professional help
Managing concentration risk isn't just about investment selection—it's about tax planning, risk management, and aligning your investment strategy with your life goals. This is exactly the kind of complex financial planning that benefits from professional expertise.
A Certified Financial Planner (CFP®) can help you:
- Quantify your current concentration risk
- Model different diversification scenarios
- Optimize the timing and tax implications of sales
- Build a comprehensive investment plan aligned with your goals
- Provide accountability and behavioral coaching to stick with your plan
Remember, the goal isn't to eliminate all risk—it's to make sure you're taking smart, calculated risks that align with your financial goals and timeline.
Key Takeaways
Concentration risk might have helped build your wealth, but it could also threaten your financial future. The key is finding the right balance—maintaining enough exposure to benefit from your company's success while protecting yourself from the inevitable ups and downs of any single investment.
Your financial plan should work for you, not against you. If the majority of your wealth is concentrated in one investment, it's time to take action. The best time to diversify is when you don't need to—before a crisis forces your hand.
Ready to take control of your concentration risk?
At Domain Money, our team of expert CFP® professionals specializes in helping high-earning professionals navigate complex equity compensation and concentration risk. We'll work with you to create a personalized plan that balances growth opportunities with smart risk management—all while optimizing for taxes and your unique goals.
Don't let concentration risk derail your financial future. Schedule a free strategy session today to learn how we can help you build a more resilient and diversified wealth strategy.
The scenarios described in this article are for illustrative purposes only and do not represent actual client situations. Individual results may vary based on personal circumstances, market conditions, and other factors. Past performance does not guarantee future results.
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