The standard industry advice for a concentrated stock position is simple: diversify, as fast as taxes allow. We think that advice skips an important question.
A client came to us with a large position in their employer's stock, built over many years at a very low cost basis. Selling would mean substantial capital gains taxes. But the real hesitation was not the tax bill. This was the company that built their career and their wealth, and they had a genuine attachment to it. Being told to sell it all felt less like advice and more like a judgment.
We did not open with a recommendation to sell. We opened with a stress test.
Using what we call our Excess Model™, we separated the client's financial life into two questions. First, what does it actually take to fund their retirement: the spending, the healthcare costs, the goals that are non-negotiable? Second, if their company stock suffered a sharp selloff of 50 percent, would that plan still work?
We ran the numbers, and the answer was yes. Their diversified accounts, savings rate, and future income were enough to carry the core plan on their own. The concentrated position, in other words, was excess. A 50 percent decline would be painful, but it would not ruin their retirement. That single finding changed the conversation. Holding the stock was no longer a risk they were taking with their future. It was a choice they could afford to make.
With that established, we put the position to work, layering a conservative covered call program over a portion of the shares to generate income, with strikes set high enough to make unwanted sales unlikely. We revisit the stress test regularly, because the answer can change as spending, markets, and the position itself evolve.
The client kept their stock. More importantly, they now know exactly why they can.
DISCLOSURES:
The scenarios described are illustrative and reflect composite situations based on actual client experiences, with identifying details and figures changed. They are provided for informational purposes only, are not representative of the experience of all clients, are not a guarantee of future results, and individual results will vary based on each client's specific circumstances.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Consilio Wealth Advisors, LLC ("CWA") is an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"). Registration does not imply any particular level of skill or training. CWA provides investment advisory services to clients nationally and notice-files in those states where notice filing is required. CWA renders individualized responses to persons in a particular state only after complying with all applicable regulatory requirements, or pursuant to an applicable exemption or exclusion.
