Part of: Equity Compensation for Executives
Managing Concentration Risk in Company Stock
When a significant share of your net worth — and often your income — is tied to a single company, that concentration introduces a risk that a more diversified portfolio doesn't carry: your financial outcome is more closely linked to a single company's performance.
Why concentration risk deserves attention
If your salary, bonus, and equity compensation all come from the same employer, a downturn at that company can affect your income and your investment portfolio at the same time. This is different from an investor holding a diversified basket of unrelated companies.
Approaches sometimes considered
Diversification over time (rather than all at once, which can have its own tax consequences), understanding any employer restrictions such as blackout periods or 10b5-1 trading plans, and considering concentration limits within a broader portfolio are among the approaches sometimes discussed. [PERFORMANCE CONTENT — DO NOT PUBLISH: no specific diversification outcomes or return comparisons may be added here.] Any decision to sell or hold concentrated stock should account for your specific tax situation and any employer restrictions.
Key takeaways
- Concentration risk means your income and investments may be tied to the same company.
- Diversification approaches often need to account for tax consequences and employer trading restrictions.
- This is generally discussed as part of a broader financial plan, not as a standalone decision.
More in this series
- Equity Compensation for Executives: Understanding Your Options
- RSUs vs. Stock Options: Key Differences