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Dealing with a Concentrated Position in Your Company Stock

Corporate stock: accumulation over time

This past year my wife and I welcomed twins — our first children — into our family.  In the months leading up to their births and the following year, we’d collected a wide variety of baby gadgets and toys.  We accumulated our collection in various ways; buying necessities, receiving gifts and and inheriting items from other parents. As the kids have grown, my wife and I noticed an increasingly large amount of clutter around our home. Things we once found incredibly valuable are less so now that the kids have either outgrown or are no longer interested in them.  The clutter takes up space in our home that could be used more efficiently.  We have a strong emotional attachment to some items, but needed to come up with a plan to re-claim parts of our house. This situation reminds me of corporate executives who have accumulated over time a lot of stock in their employing company.  The concentrated stock accumulation has been a similar progression; they’ve purchased shares through Employee Stock Purchase Plans or stock options or they’ve been given shares via vested restricted stock and matching 401(k) contributions into the company stock fund.  Hard work and loyalty often instills an emotional attachment to owning the stock.

Having too large of a concentration in one stock

Regardless of how the stock came to be, it can grow to be a disproportionally large portion of the overall investment portfolio.  Just like the baby clutter in my home, too large of a concentration in one stock can take up space that could otherwise be used to own other investments for a more efficient portfolio.  As the stock concentration grows so does the investment risk of the entire portfolio.  Just like my wife and me, these corporate executives need a plan to re-claim parts of their portfolio.

Left unmanaged, a large decline of the company stock can adversely impact a long term financial plan and potentially derail it.  I think about a few of the baby gadgets that were recalled after I purchased them.  Had it not been for diligent and proactive risk management by my wife, we may have found ourselves in a bad situation.  A concentrated stock portfolio should be proactively managed as well.

The need to declutter

We know we will be better off if we declutter.  Corporate executives should know they can reduce the risk of their investments and improve the probability of success of their financial plans by de-cluttering their stock concentration.  Why then, is it so difficult to make this happen?  Emotions can easily over take rational thinking and lead us down the path of procrastination.  Guilt and fear of regret are two emotions that can cause us the most harm. However, the reality is that by letting go of certain items we’re actually paving the way for a better path forward.  We will refill the space with other items that will create new memories for our family.  For the corporate executive, letting go of their stock concentration will create new opportunities for them too.  Below are some strategies that I plan to implement to better my situation.  Each of these also applies to a corporate executive looking to manage their concentrated stock:

  • Donate to charity. By doing this I know that the strollers and cribs that were so useful to me will serve the same role of another family. I’ll also get satisfaction knowing other children will enjoy playing with the toys.  The same thing can be done with company stock.  Donating portions of a concentrated stock position directly to a charity is an efficient tax and investment strategy to reduce your exposure.  In addition to getting an income tax benefit for the charitable deduction you will also get the satisfaction knowing the value of that stock will be used for something important to you.  The corporate executive can donate stock directly to a charity or indirectly via a Charitable Donor Advised Fund. Stock with a low tax cost basis are ideal candidates for gifting.
  • I am going to preserve some of the items that I’m not sure if we’ll keep or not. To be honest, there are some things I’m just not ready to let go of.  However, I don’t want them sitting in my living room or tucked in the corner of my basement collecting dust either. I’ll put things away securely in sealed bins so they are in good condition until I may I need them again. A collar option strategy can be a similar strategy for your concentrated stock.  A collar involves purchasing protective put options on your stock while selling out-of-the-money call options on the same stock.  The put option sets a floor on your stock, protecting you on the downside.  Selling call options provides you with the income needed to purchase the put options.  If implemented correctly a collar can help protect your stock from large fluctuations in value over a pre-specified period of time. 
  • I am going to exchange some of the newborn gadgets with expectant parents who also have items for toddlers. They will get the benefit of having the latest and greatest in baby technology and I’ll get the benefit of not having to buy a ton of new stuff when my kids are two or three years old. Exchange funds for concentrated stock positions exist and operate in much the same way. Large positions of stock can be contributed into an exchange fund and in return, the investor receives shares in the fund which is diversified across many different companies.  This is a strategy for someone looking to reduce their investment risk in one company without selling the stock and realizing a large capital gain and the taxes associated with it.
  • We’re recycling what we can. Some of toys and gadgets are past their useful lives, but we don’t want to just throw it out.  Strategically selling portions of your concentrated stock in a risk and tax efficient way is very similar.  Agreeing on a capital gain and risk budget each year, stock can be sold and reinvested (recycled) into other investment opportunities that represent a better value in your portfolio.
  • Frankly, I am going to keep some things but with a limitation. Some items, like the Little Tikes basketball hoop, can be used for the next few years.  There are also some things we would like to pass down if we ever have grandchildren.  It is OK to keep some of your company stock, too.  Determining an appropriate percentage of your portfolio that will remain invested in the company stock and then managing to that target over time is perfectly fine. Having this structured framework can provide you continued enjoyment of the stock you worked so hard for.  The stock can also be transferred to younger generations if you would like this to be part of your legacy.

For corporate executives still working it is also important to proactively strategize on how to best deal with new stock as it is acquired or awarded.  Assessing the exposure, value and utility of the things we own from time to time can be a worthwhile exercise. Whether it be a large collection of baby items or a concentration of company stock, knowing what you own and understanding how it impacts your life in the near and far term makes a lot of sense.

Each strategy has tradeoffs.  The role of an advisor is to help you determine which combination of strategies is most appropriate for your personal circumstance.  If establishing a solid foundation on which to make decisions about your company stock sounds appealing, we are here to help build that plan.


Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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