by Steve Fillingim

When it comes to managing the wealth you’ve accumulated in any one stock, have you ever asked yourself, “How much is too much?” Holding a large position in one stock generally increases your risk level compared to a well-diversified portfolio.¹ In 2006, Congress posed (through the Pension Protection Act) that if an investor has more than 20% of a portfolio in one security or industry, the portfolio may not be properly diversified. Your specific risk tolerance may allow for more or less than 20% of one security.

An investor with a significant portion of his or her wealth in one stock may have accumulated that concentrated position in a number of ways, such as:

• Equity compensation, including stock options and restricted stock
• Building sizable positions of company stock in an employer-sponsored retirement plan
• Being a corporate insider and subject to further “windows” or restrictions to follow upon sale of the stock  
• Selling a business and receiving stock in a publicly-traded company in return
• Inheriting sizable stock positions built over multiple generations

If you find yourself in a situation where you need to increase cash flow, reduce your portfolio’s risk profile by diversifying your investments, or reduce adverse income and estate tax consequences, your Financial Advisor can help you sort through your circumstances and work with your tax and legal advisors toward your objectives. The following descriptions give an overview of several alternatives you may want to consider for managing your concentrated equity position.

Gradually selling and repositioning. Sometimes the simplest strategy can be the most appropriate. You can gradually sell shares and reinvest the proceeds into investments that may better meet your changing needs. By selling over time, you can spread your gain (and corresponding tax liability) over time, perhaps several tax years (discuss this with your tax advisor). Not only can this strategy help you diversify your portfolio and maintain full control of after-tax proceeds, it can also help you retain control of your financial situation, stopping and starting the sale of shares as needed. This gives you the chance to reinvest proceeds over time, adjusting your investment selections as appropriate.

You may want to combine this basic strategy with more advanced strategies, such as hedging or establishing a charitable remainder trust. (Note: if you are a corporate insider or manager, your

company’s policies may not allow certain hedging or options-based strategies. Be sure to check with corporate counsel before embarking on any of these alternatives.)

Part 2 of this article will appear in our February issue.

This article was written by Wells Fargo Advisors and provided courtesy of Steve Fillingim, 1^st Vice President of Wells Fargo Advisors. Further information can be obtained by calling him at (951) 699-1833.