Is your portfolio too concentrated?

In investing, success can create its own challenges.

You may have built a large equity holding in your company, inherited a meaningful stock position, or simply made a brilliant investment years ago. Now, it has grown in value and come to represent a significant portion of your overall wealth.

From this point, this “concentrated stock position” could come to feel like an anchor, as it potentially exposes your portfolio to higher volatility and steep drops in value. That can make it harder for you to invest with the appropriate level of risk and expected return for your financial goals.

Complicating matters, selling the holding can feel impossible, whether because of the tax consequences, an emotional connection, a fear of missing out on potential future gains – or all of the above.

If, like many investors, you face this dilemma, here’s what to know and next steps to consider.

Generally, a concentrated stock position is when one or just a handful of stocks make up a large percentage of your portfolio’s overall value. Morgan Stanley Wealth Management’s Global Investment Office defines it a little more precisely as: any group of five or fewer stock holdings that collectively contribute more than 30% to portfolio-level risk. That concentration often accompanies a period of historical outperformance.

For one, it is far from assured that this investment will continue to generate attractive returns in the future. In fact, most stocks underperform their benchmark index’s risk-adjusted returns over both short and longer historical timeframes. And stocks that have outperformed over a given period tend to disappoint in the subsequent period.

Holding onto a concentrated stock position may lead to challenges for investors, such as higher portfolio volatility and potentially steep drawdowns. Consider:

• Since 2014, for individual stocks in the Russell 1000 Index, the average volatility has measured 37% annually, compared to just 15% for the index overall.
• The average stock in the index has suffered a maximum decline of 50% – double the index’s 25% maximum drop.
• 85% of stocks experienced a larger decline than the Russell 1000 itself over this period.
• Of the stocks that suffered a “catastrophic loss” over the past 10 years, which we define as a 50% peak-to-trough drop, nearly 40% never recovered fully.

Such adverse outcomes could materially diminish an investor’s wealth, especially in the case of concentrated positions.

If you’re concerned about holding a concentrated position, a first step is assessing the level of risk you may face. Morgan Stanley Financial Advisors have access to proprietary tools that can help identify potential vulnerabilities for holders of concentrated equity and can suggest more risk-sensitive management strategies for your portfolio.

If you assess the risk and determine that diversification is necessary, there are a number of strategies to consider, either alone or in combination. Some may be more appropriate for you than others, based on your unique circumstances, preferences, and the size of your holdings. They include:

1. Holding the concentrated equity: This strategy involves maintaining your current position and benefiting from simplicity and tax deferral, but it keeps your portfolio exposed to high volatility and risk.
2. Options-based strategies: Using certain derivatives strategies like “protective puts,” “covered calls,” and “equity collars” can help manage risk and generate income while maintaining ownership of the stock. However, these strategies are not for everyone. They can be complex, may have tax implications, and generally should be pursued only with help from a professional.
3. Planned giving: Donating stock to charity can help diversify your portfolio while allowing you to pursue your charitable goals. Strategies like donor-advised funds and charitable remainder trusts, for instance, offer flexibility and potential tax advantages.
4. Exchange funds: By exchanging your stock for shares in a pooled, diversified exchange fund, you can reduce risk without immediate tax consequences. This strategy requires a long-term commitment and generally is available only to investors above a certain wealth level.
5. Selling and diversifying: Selling the stock provides immediate diversification but may result in significant tax liabilities. Strategies like staged selling or using tax losses in your portfolio to offset tax gains can help mitigate these costs.

Each strategy has its own potential benefits and considerations, and it’s important to work with a Financial Advisor to choose the ones that align with your financial goals and risk tolerance. Ultimately, putting the right combination of strategies in place can help you shift focus – from pursuing upside in a specific stock position, to achieving broader goals, such as reducing portfolio risk, mitigating the impact of taxes, and enhancing income, as part of a holistic and resilient financial plan.

A Morgan Stanley Financial Advisor can offer customized solutions to help you meet the challenges of holding a concentrated equity position, from tax-efficient strategies, to innovative alternative investments, to exclusive thought leadership. The size, scale, and support of Morgan Stanley can help you not just diversify—but diversify well.

Morgan Stanley, including through its Financial Advisors, does not provide recommendations or advice on the over-the-country equity option/derivative products discussed in this publication.

CRC# 4812260 09/2025