Learning how to diversify concentrated stock is one of the most valuable planning decisions for executives, engineers, and long-tenured employees whose wealth has accumulated in a single company. Selling triggers capital gains tax, while holding keeps a large share of your net worth tied to one business, often the same employer that pays your salary. Diversifying usually involves paying some tax, so the goal is to manage the tax impact across several years and strategies rather than to eliminate it.
If your concentrated position comes from RSUs, stock options, or an employer plan, you can schedule a call with Inclinevest Wealth Management to talk through your numbers. You can also review our equity compensation planning page and services and fees to see how we approach these decisions.
Why Diversify Concentrated Stock in the First Place
A single stock can do very well, and many concentrated positions exist because one did. The research on individual stocks explains why diversification still matters. Hendrik Bessembinder’s study of U.S. stocks since 1926, published in the Journal of Financial Economics, found that the majority of stocks had lifetime returns below one-month Treasury bills, and that the best-performing 4 percent of companies explain the net gain of the entire U.S. stock market. Owning one company means betting that it belongs to that small group.
For employees there’s a second layer. Your paycheck, bonus, unvested equity, and professional reputation depend on the same company as your stock does. If the company struggles, your income and your portfolio can decline at the same time. Reducing the position lowers that overlap even when you still believe in the business.
How to Tell Whether a Position Is Concentrated
There’s no single threshold. Many planners start paying close attention when one holding reaches roughly 10 percent of investable assets, and they look harder when the company also employs you. These questions help frame the decision:
- What share of your investable net worth does the position represent?
- How much of your income and future equity grants depend on the same company?
- How much of the position will you need for spending over the next five to ten years?
- What are the cost basis and holding period of each tax lot?
- Do blackout windows, insider trading policies, or lockups limit when you can sell?
The Tax Math Before You Sell
The tax cost of selling depends on your cost basis, holding period, and income. Long-term gains on shares held more than a year are generally taxed at 0, 15, or 20 percent federally, and higher-income households may also owe the 3.8 percent net investment income tax, plus state tax where it applies. Shares held a year or less are taxed at ordinary income rates. As an example, an $800,000 gain on a position with a $200,000 cost basis could produce federal tax of roughly $150,000 at 15 percent plus the 3.8 percent surtax, or about $190,000 at 20 percent plus 3.8 percent, before state tax.
Three details change the math. First, RSU shares carry a cost basis equal to their value at vesting, so recent vests often hold little gain and can be sold with little additional tax. Second, shares from older grants and long holding periods usually carry the largest gains, and choosing which tax lots to sell lets you sell the highest-basis shares first. Third, capital losses offset capital gains, and net losses beyond that offset up to $3,000 of ordinary income per year, with the remainder carried forward.
Holding has its own tax feature. Heirs generally receive a step-up in basis at death, which can erase the embedded gain. Relying on that means keeping the concentration for the rest of your life, so it belongs in the plan as one factor among several.
Ways to Diversify Concentrated Stock
Most households combine several approaches rather than relying on one. These are the main options for how to diversify concentrated stock.
Sell on a schedule
Spreading sales across several tax years can keep gains out of the highest brackets and reduces the risk of selling everything at one price. Employees who face blackout windows or hold material nonpublic information often use a Rule 10b5-1 trading plan, which sets the sales in advance. A written selling schedule also removes the pressure of deciding each quarter.
Pair sales with losses
Losses harvested elsewhere in your portfolio offset gains from selling concentrated shares. The losses can come from taxable investments that have declined or from a tax-managed account that realizes losses on an ongoing basis. That second approach is covered in the Dimensional section below.
Give appreciated shares
Donating appreciated shares to charity or to a donor-advised fund avoids capital gains tax on the gift and generally provides a charitable deduction at fair market value, subject to adjusted gross income limits. For long-term appreciated stock given to public charities, the limit is generally 30 percent of adjusted gross income, with a five-year carryforward. Households that give regularly can direct their lowest-basis shares to charity and sell higher-basis shares for cash. Gifts to family members involve gift tax rules and carryover basis, so they need to fit your estate plan.
Exchange funds
An exchange fund lets you contribute concentrated shares to a pooled partnership in return for an interest in a diversified basket, without recognizing a gain at contribution. These funds typically limit participation to qualified purchasers, require a holding period of about seven years, and must hold a portion of their assets in illiquid investments such as real estate. Costs, liquidity, and the fund’s holdings all need close review.
Charitable remainder trusts
A charitable remainder trust is an irrevocable trust that can sell contributed shares without capital gains tax at the trust level. It pays you or your beneficiaries an income stream for a term or a lifetime and leaves the remainder to charity. It suits households with charitable intent who are comfortable giving up the asset.
Hedging with collars
Options strategies such as collars and prepaid variable forward contracts can limit downside while you continue to hold the shares. They involve complexity, costs, constructive sale rules, and, for insiders, company restrictions, so most households use them selectively and with legal and tax review.
Using a Dimensional SMA to Diversify Concentrated Stock
A separately managed account, or SMA, holds individual securities directly in your name instead of shares of a fund. That structure lets losses and gains be managed at the level of each underlying stock and tax lot. With a fund or ETF you can still choose which fund shares to sell, but you can’t realize a loss on an individual stock held inside the fund. Dimensional’s SMA platform is one way to put that structure to work as you diversify concentrated stock over time. The platform is available only through financial advisors approved by Dimensional, and Inclinevest Wealth Management is one of them.
What makes the Dimensional SMA different
Many direct indexing accounts replicate the S&P 500 or another market index. A Dimensional SMA starts from a different place. It follows a research-based strategy that targets what Dimensional describes as the long-term drivers of stock returns: smaller companies, lower relative prices (value), and higher profitability. These are the dimensions of higher expected returns behind Dimensional’s approach. Instead of holding the 500 companies in the S&P 500, the SMA holds more than 1,000 individual positions across global markets, according to Dimensional, and it can apply ESG or other values-based preferences. Expected returns aren’t guaranteed, and these premiums can fail to appear for long stretches, so an SMA can differ meaningfully from a market index over any period.
Through Dimensional’s unified managed account (UMA) platform, one account can hold the SMA together with Dimensional mutual funds, Dimensional ETFs, and non-Dimensional ETFs. Dimensional applies its tax management across the account, with SMA and fund holdings monitored at the tax-lot level.
Ongoing contributions help the tax management over time. In many direct indexing accounts, harvesting opportunities fade after a few years because most of the original tax lots have appreciated. When you add money each month, the account can buy new tax lots at current prices, and those new lots can create fresh opportunities to harvest losses if prices later fall. The benefit depends on market conditions and isn’t guaranteed.
How the tax management works
The process starts with a tax transition analysis, which estimates the tax cost and benefit of moving from your current holdings, including a concentrated position, into a diversified strategy, so you can see the numbers before you decide how to proceed. Each day, Dimensional monitors holdings at the tax-lot level for tax-efficient rebalancing, meaningful tax-loss harvesting, and wash sales. It also weighs capital gains and dividend income when it decides what to trade. For someone working through a concentrated position, an SMA funded with cash can begin banking losses that offset future gains, such as the gains from selling company shares over several years. The platform can exclude a stock based on company employment, so your employer’s shares aren’t bought inside the account, and it identifies highly appreciated holdings for gifting.
Two cautions come directly from Dimensional’s disclosures. The firm monitors accounts regularly but may not harvest losses every day, and events such as contributions, withdrawals, custodian changes, or identical securities held in outside accounts can limit harvesting and create wash sales. Dimensional also doesn’t guarantee any tax outcome.
Harvested losses offset capital gains first and then up to $3,000 of ordinary income per year, with the rest carried forward. They don’t offset the ordinary income from RSU vesting beyond that limit. Harvesting also lowers the cost basis of what you hold, which defers tax rather than eliminating it. The deferral can last a long time, and heirs generally receive a step-up in basis.
What it costs
Platform fees on Dimensional’s UMA, as provided by Dimensional, are based on the daily holdings of each component and charged quarterly in arrears:
- Dimensional SMA (direct equity): starting at 0.29 percent
- Dimensional mutual funds and ETFs: 0.00 percent platform fee, with each fund’s own expense ratio applying separately
- Non-Dimensional ETFs: 0.10 percent
- Account minimum fee: $250 per year
To open a UMA account, Dimensional generally requires a $250,000 minimum account size, a $250,000 minimum for the direct equity SMA allocation, and at least a 25 percent Dimensional allocation in the target asset mix. Our advisory fee is separate from these platform fees. Most Inclinevest relationships are priced between 0.50 percent and 1.00 percent of assets annually, decreasing as assets grow, and the fee applies to the whole account. It covers tax planning and oversight of the account’s tax management, ongoing monitoring, investment management, and financial planning. Weigh the total cost, including the platform fees and fund expenses, against the tax savings you can reasonably expect.
For comparison, Schwab’s own guidance puts direct indexing management fees at roughly 0.30 to 0.40 percent, so a Dimensional SMA starting at 0.29 percent begins at or just below the low end of that range. The two approaches aren’t identical, so compare what each seeks to deliver as well as what each costs.
Who it fits
A Dimensional SMA tends to suit households that have:
- Taxable assets of at least $250,000 to meet the platform minimums
- Meaningful gains to offset now or later, such as a concentrated position, RSU sales, or a business sale
- New cash or a concentrated position to transition into a diversified portfolio
- A higher tax bracket, where harvested losses carry more value
- Comfort with a strategy that tilts toward smaller, lower-priced, and more profitable companies and can trail the S&P 500 for years
Retirement accounts such as IRAs generally can’t use the tax management features. A simple ETF portfolio can be a better fit for smaller accounts or accounts with no gains to offset. Investing involves risk, including loss of principal, and there’s no guarantee any strategy will be successful.
A Step-by-Step Plan to Diversify Concentrated Stock
- List every tax lot with its cost basis, purchase or vesting date, and holding period.
- Set a target for the share of investable assets you’re comfortable holding in one company.
- Check company rules, including blackout windows, insider policies, lockups, and tender offers.
- Choose a pace: a single sale, a multi-year schedule, or a mix of sales, giving, and exchange funds.
- Line up offsetting losses and gifts through a tax-managed account, a donor-advised fund, or charitable planning.
- Reinvest the proceeds in a diversified portfolio that matches your plan, and review the position each year.
A Hypothetical Example of the Strategies Working Together
Consider an executive with $1.5 million of appreciated employer stock. Of that, $400,000 vested within the past year, so its cost basis is close to its current value. The other $1.1 million comes from older grants and has a $300,000 cost basis, which means an $800,000 embedded gain.
One way the plan could work is to sell the recently vested shares first, since they carry little gain, and use the proceeds to fund a tax-managed account such as a Dimensional UMA. The older shares could then be sold over about four years, roughly $275,000 per year, which spreads the $800,000 gain into portions of about $200,000 per year instead of one large taxable event. If the tax-managed account realizes losses along the way, those losses can offset part of each year’s gains. If the executive already intends to give to charity, the lowest-basis shares could be gifted to a donor-advised fund in place of cash.
This is a hypothetical illustration, not a recommendation or a projection of results. The right mix depends on actual cost basis, income, account structure, company trading restrictions, and tax circumstances.
How Inclinevest Wealth Management Helps You Diversify Concentrated Stock
Inclinevest Wealth Management is a fee-only fiduciary firm, so our advice on concentrated stock isn’t influenced by commissions or product sales. Equity compensation is a core part of our work with technology, aerospace, and defense professionals, and we coordinate the sale schedule, the tax plan, and the replacement portfolio together. Our team includes two CFP® professionals, and Sunisa is also an IRS Enrolled Agent, which adds direct tax expertise to the planning. Your assets are held at Charles Schwab & Co., Inc., and we compare tax-managed SMA options, including Dimensional and Parametric, because one can fit better than the other depending on the situation. Our investment approach is global, evidence-based, and low-cost, described on our investment philosophy page.
When it fits your situation, we can use tools such as a Dimensional SMA alongside gifting, staged sales, and your CPA’s and attorney’s input. If you’re ready to look at your own position, you can schedule a conversation, review our services and fees, or read how we help high-income professionals manage complex compensation.
Key Takeaways
- Most individual stocks don’t beat Treasury bills over their lifetimes, which is why many households choose to diversify concentrated stock.
- The tax cost depends on basis, holding period, and income, and RSU shares carry a basis equal to their value at vesting.
- Options to diversify concentrated stock include staged sales, pairing sales with losses, gifting appreciated shares, exchange funds, charitable remainder trusts, and hedging.
- A Dimensional SMA starts with a tax transition analysis, then monitors holdings daily at the tax-lot level and can bank losses to offset future gains, though it may not harvest every day and doesn’t guarantee a tax outcome.
- Dimensional’s UMA platform fees start at 0.29 percent for the SMA, with a $250,000 minimum account size and a 25 percent minimum Dimensional allocation.
- Harvested losses defer tax by lowering basis, and they offset RSU ordinary income only up to $3,000 per year.
About the Author
Gabriel Motta, CFP®, MBA, is the founder and principal of Inclinevest Wealth Management, a fee-only fiduciary retirement financial advisor and financial planner. He works with high-net-worth pre-retirees and retirees nationwide, with particular experience serving aerospace and defense professionals. As a retirement planner and wealth manager, Gabriel helps clients navigate retirement income planning, Social Security strategy, tax-efficient withdrawals, and equity compensation. Gabriel is a NAPFA and XY Planning Network member. Learn more about Gabriel and Inclinevest Wealth Management (https://www.inclinevest.com/about-inclinevest-denver/) or schedule a conversation (https://calendly.com/inclinevest/inclinevest).
Sources
- Do Stocks Outperform Treasury Bills?, Hendrik Bessembinder, Journal of Financial Economics (2018): https://doi.org/10.1016/j.jfineco.2018.06.004
- Separately Managed Accounts (SMAs), Dimensional: https://www.dimensional.com/us-en/separately-managed-accounts
- Unified Managed Accounts (UMAs), Dimensional: https://www.dimensional.com/us-en/unified-managed-accounts
- Dimensional UMA platform fee and minimum information, provided to Inclinevest Wealth Management by Dimensional (October 2026)
- The Pros and Cons of Direct Indexing, Charles Schwab: https://www.schwab.com/learn/story/pros-and-cons-personalized-indexing
- Direct Indexing, Goldman Sachs Asset Management: https://am.gs.com/en-us/advisors/products/direct-indexing
- Topic No. 409, Capital Gains and Losses, Internal Revenue Service: https://www.irs.gov/taxtopics/tc409
- Net Investment Income Tax, Internal Revenue Service: https://www.irs.gov/individuals/net-investment-income-tax
- Publication 526, Charitable Contributions, Internal Revenue Service: https://www.irs.gov/publications/p526
This article is for general informational and educational purposes only. It isn’t personalized investment, tax, or legal advice, and it shouldn’t be relied on as a substitute for guidance specific to your situation. Inclinevest LLC is a registered investment adviser. Registration doesn’t imply any level of skill or training. Please consult a qualified professional before making decisions about your own financial circumstances.
