The concentrated stock problem
Every long-tenured professional eventually faces it: a large, appreciated, emotionally-entangled position in their employer's stock. This letter lays out the frameworks — how much concentration is too much, the rules people use to unwind it, and the psychology that keeps positions glued together long past prudence.
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How much is 'too much' — the honest yardsticks
There's no universal number, but there are useful yardsticks. The question is always the same one underneath: if this ONE company had an Enron decade, what happens to your plans?
| Yardstick | The rule of thumb | What it's really asking |
|---|---|---|
| Share of net worth | No single stock > 10–20% of investable assets | Could your finances survive this company failing while you ALSO lose your job? |
| Share of income | Equity comp > 50% of total income | Are you already being paid in this currency — do you also need to save in it? |
| Emotional test | Would you buy this much of this stock TODAY with cash? | The position you wouldn't buy but won't sell is inertia wearing loyalty's clothes |
Employer stock adds a correlation most portfolios never face: your income AND your investments ride the same company. The yardsticks exist because the failure case is dual — job and portfolio, together.
Unwinding: the rules people actually use
- The schedule rule: sell a fixed percentage quarterly or annually until you reach your target allocation — automatic, unemotional, and immune to 'this quarter feels like a bad time.'
- The threshold rule: whenever the position exceeds X% of investable assets, trim back to target at the next scheduled review.
- The tranche method: for appreciated low-basis shares, spread sales across tax years to manage capital gains — often paired with charitable giving strategies for the largest lots.
All three share one design principle: they move the decision from a bad moment (the day you're tempted to time it) to a calm one (when you wrote the rule). Rules are how patience survives news cycles.
The psychology: why positions stay glued
Concentration persists for names that sound like reasons: loyalty ('the company's been good to me' — the company will not notice your portfolio), the anchor ('it was $180 once' — the stock does not remember), and the tax hesitation (a real cost, always modeled — and usually smaller than the risk it's being used to avoid). The honest question isn't 'do I love this company' but 'does my plan survive its worst decade?'
Diversification is not a bet against your company. It's the refusal to bet your entire future on any one company — including the one that signs your checks.
The Quiet Money Review, letter three
Frequently asked questions
What about capital gains taxes on selling?
Real and worth modeling — long-term gains rates apply to shares held past a year, and the tranche method spreads the bill across years. But taxes are a PERCENTAGE haircut on gains you keep; concentration risk is the potential for the whole gain to vanish. Both costs go on the page; only one of them is usually decisive.
Doesn't selling mean I'll miss the upside?
Some, likely — diversification always trades the best possible outcome for reliability. The question is whether the plan (retirement, home, education) can afford to depend on the best case. Players who NEED the best case are concentrated whether they admit it or not.
Are there tools for big low-basis positions?
Several exist (exchange funds, charitable remainder trusts, gifting programs) — each with real mechanics, real costs, and real eligibility rules. They're the domain where a fee-only professional earns their keep precisely because they're easy to oversell. Learn the framework here; execute with counsel.