The Wisdom of Not Putting All Your Eggs in One Basket
Investments Series
It’s one of the oldest pieces of financial advice in existence. It’s also one of the most consistently ignored.
Concentration risk - having too much wealth tied up in a single stock - is one of the more common and potentially serious situations we encounter with clients. It shows up most often in two forms: employees or retirees of large companies who accumulated significant stock through employer plans and never diversified, and people who inherited shares from a parent or grandparent who built a position over a lifetime.
Both situations carry real financial risk. Both also can carry something harder to address: emotional attachment.
The Affinity Problem
When someone has spent thirty years at a company, watched it grow, tied their professional identity to its success, and accumulated a meaningful position in its stock, that stock isn’t just a financial asset. It’s a symbol of their career, their loyalty, their success, and in many cases their identity.
When a parent held the same stock for decades and specifically instructed their children never to sell it, diversifying can feel like a betrayal.
These emotional dimensions are real, and they deserve to be treated with respect rather than dismissed. The first question in any concentrated position conversation isn’t about tax strategy or diversification math. It’s simply: how do you feel about this?
Sometimes the answer is “I don’t have any particular attachment to it - I know it’s too much, I just haven’t dealt with it.” That’s the easier conversation. We move fairly directly to the question of how to diversify in a tax-efficient way.
But sometimes the answer reveals real affinity. In those cases, the process takes longer. You present the risks, you have the conversation, you let it sit. Most clients, given time and information, eventually arrive at the same conclusion - but they need to arrive there themselves and it’s important to understand and respect that.
Why Single-Stock Risk Is Different
The theoretical case for diversification is well established. The lived examples make it real.
General Electric was once considered the best-managed company in the world. A generation of employees and investors built significant wealth in GE stock. Over the course of several years in the late 2010s, the stock fell to a fraction of its peak value. People who held concentrated positions in what they believed was an unassailable company found themselves in very different circumstances than they’d planned for.
The same story has played out at other companies that were, at their peaks, considered essential and permanent. A stock that looks like a permanent winner rarely is - and when it isn’t, the people most hurt are the ones who held the most of it.
Diversification doesn’t eliminate risk. Nothing does. What it does is ensure that no single company’s problems become your problems.
The Tax Dimension
Here’s where concentrated positions get genuinely complicated: many of them carry significant embedded capital gains, sometimes accumulated over decades.
Selling a position with a low cost basis triggers a taxable event. On a large position, the tax bill can be substantial. This is real money, and it’s a legitimate reason to think carefully about the timing and pace of diversification rather than simply liquidating everything at once.
Several strategies can help. Spreading the sale over multiple years distributes the tax liability rather than concentrating it in one year. For clients, upon reaching retirement, find themselves at income levels at which long-term capital gains are taxed at reduced rates - or not at all - which creates windows to diversify more cost-effectively.
Charitable giving can also play a role. Donating appreciated stock directly to a charity - rather than selling the stock and donating cash - allows the client to take a charitable deduction on the full market value of the shares while avoiding the capital gains tax on the appreciation. The charity receives the same value either way. For clients who give regularly, this can be a meaningful strategy.
There are other strategies that we can explore that go beyond the scope of this article.
The key in all of this is having a plan rather than a reaction. Too often, concentrated positions get addressed only after something goes wrong - a sudden drop, a company crisis, a health event that forces a financial reckoning. A thoughtful, gradual approach started from a position of stability almost always produces better outcomes than a forced sale under pressure.
The Question Worth Asking
There’s a tendency, when a stock has been good to you for a long time, to assume it will continue to be. And sometimes that’s right - great companies can remain great for decades.
But the question worth asking isn’t “has this been a good investment?” It’s “is this the best use of this capital going forward, given my full financial picture?”
For many clients with concentrated positions, the honest answer is no. The position has served them well and gotten them to where they are. Diversifying doesn’t dishonor that history - it can help preserve the wealth that history created.
The other question worth asking is what would happen if this stock fell 50%. Not what’s the probability of that happening, but what would it mean for your life? If the answer is “it would fundamentally change my retirement plans,” that’s a meaningful signal that the concentration deserves attention.
We have this conversation regularly, though we don’t have it in a heavy-handed way. The goal isn’t to alarm clients or push them toward decisions they’re not ready to make. It’s to make sure the risk is visible, understood, and accounted for in the overall plan.
The Bottom Line
Single-company stock is not the same as a diversified investment. No matter how well-run the company, no matter how long it’s been growing, no matter how much confidence you have in its future - concentration in any single stock represents a risk that doesn’t exist in a well-diversified portfolio.
The good news is that addressing it doesn’t require selling everything at once. It requires a plan, some patience, and someone who can help navigate the tax dimensions and the emotional ones with equal care.
The goal isn’t to abandon what got you here. It’s to make sure what got you here doesn’t become a risk to where you’re going.
Rawe Financial is a family-owned financial advisory practice in Northern Kentucky, helping individuals and families build and protect wealth at every stage of life. If you want to look and see if you’re adequately diversified, we’d welcome a conversation.
Disclosure
This material is intended for informational/educational purposes only and should not be construed as tax/legal/investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.