Advisors spread risk in stock-heavy portfolios
Financial advisors are increasingly using a mix of tools to help clients reduce the risks of holding too much wealth in a single stock. The challenge is especially common for early investors and employees at high-profile tech companies like SpaceX, Anthropic, and OpenAI, many of whom now face concentrated positions as those firms prepare for public markets.
Strategies vary—from exchange funds to tax-aware long/short portfolios—but advisors emphasize tailoring the approach to each client’s tax situation, liquidity needs, and timeline. “It’s not ‘one size fits all,’” said Shang Chou, co-founder of Pasadena-based RIA Dishmi Capital. “We need to understand what you’re trying to do, then combine solutions from the toolkit to align with that.”
The psychology of letting go
Clients often resist diversifying, particularly when a stock has driven most of their wealth. Erik Kratz, chief investment officer at Chicago-based Arena Private Wealth, said the reluctance makes sense in a market that hasn’t seen a major downturn in years. He avoids framing the conversation around risk and instead highlights what clients might miss by not reallocating—growth themes like semiconductors or infrastructure.
A 2023 study by Brooklyn Investment Group, New York University, and Yale found that 93% of stocks in the top 20% of performers over five years saw their market-adjusted returns turn negative within a decade. The median loss was 17.8%. Chou, whose firm manages $250 million, said these findings explain why advisors recommend gradual diversification, even when clients insist the stock will keep rising.
Chou’s personal experience shaped his approach. His wife worked at two biotech startups that were acquired, first by Gilead Sciences for $11.9 billion and later by AbbVie for $63 billion. The windfall left them overconcentrated in a single sector. “I made every mistake in the book,” he said. “Back then, there weren’t many good solutions for concentration risk, and we ended up paying more in taxes than we should have.”
Trade-offs in every tool
Today’s options come with compromises. Exchange funds allow investors to pool their stock with others and later withdraw a diversified basket, but the process locks up capital for seven years, and the final mix of assets is unpredictable.
For clients needing immediate diversification, exchange funds work well. Those with more time might prefer hedging strategies, like options overlays, which let them monetize holdings while deferring taxes. Dishmi Capital often pairs these with tax-aware portfolios, using proceeds to offset gains and generate returns.
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Section 351 conversions, which convert single-stock positions into ETFs, have also gained traction. Chou noted their utility in providing liquidity and flexibility.
The process isn’t always smooth. Chou described a client who was an early executive at a tech company whose stock fell from $120 to $20 a share. Before the liquidity lock-up ended, Dishmi allocated 20% of the holdings to an exchange fund. Over the next three years, the firm used options overlays as part of a strategy on the remaining 80%. The proceeds went into a tax-aware portfolio. “The client will end up with zero single stock, 100% diversified exposure,” Chou said.
For advisors, the work involves as much psychology as mechanics. The tools exist, but convincing clients to use them requires balancing data with an understanding of what they stand to lose—financially and emotionally.
Market shifts can happen quickly. A stock that seems unstoppable today might not exist in a decade. The challenge isn’t just choosing the right strategy; it’s implementing it before the opportunity disappears.
Chou’s firm now layers exchange funds, hedging, and tax-aware strategies to create a buffer against market swings and client hesitation. The goal isn’t perfection—it’s flexibility. “You have to be willing to adapt,” he said. “The worst mistake is waiting until it’s too late.”
Advisors also face the task of keeping clients informed about evolving options. New tools are emerging to assist with decision-making, though the human element remains critical in managing concentrated positions.
