Portfolio Structure · 7 min read
What a Concentrated Stock Position Is For
A concentrated stock position is a large share of a household’s wealth held in one company. The research is plain about the odds: from 1926 to 2016, about 4 in 100 listed companies produced all of the stock market’s net gains over one-month Treasury bills, and the other 96, taken together, matched the bills. That finding does not say any particular company will fail. It says the position needs a stated purpose. Once the purpose is clear, the size of the holding, the schedule for reducing it, and the tax cost of doing so follow from that answer rather than from the price on any given day.
Most concentrated positions were never chosen. They arrived as restricted stock units that vested every quarter, as options exercised in a good year, or as shares in a company a parent built. The position grew because the company did well, and now it is a large share of the household’s net worth. The first question we ask is not whether to sell. It is what the position is for.
What the research found, and what it does not say
In 2018 the Journal of Financial Economics published a study of every common stock in the CRSP database from July 1926 to December 2016 — nearly 26,000 stocks. The best-performing 4% of listed companies explain the entire net gain of the U.S. stock market over one-month Treasury bills. The other stocks, taken together, matched the bills. (Bessembinder, J. Fin. Econ. 129, 2018, abstract) In the body of the paper the number is exact: 1,092 companies, 4.31% of the 25,332 firms that issued stock. (Bessembinder 2018, Section 5)
Two qualifiers keep the finding honest. It is a group result: inside the other 96%, 9,579 companies created wealth over their lifetimes and 14,661 destroyed it. And only 42.6% of individual stocks beat one-month Treasury bills over their own lifetimes. (Bessembinder 2018, Sections 3 and 5)
The study does not say that any particular company will fail. It says the odds of holding one of the 1,092, chosen in advance, are poor. That is why the author concludes that “poorly diversified active strategies most often underperform market averages.” A large holding in one stock is a poorly diversified strategy, whether or not anyone meant it as one.
The four honest reasons a position exists
When we sit with a household that holds a position like this, the reasons for keeping it are rarely careless. They fall into four groups.
- Belief. The holder knows the company from the inside and expects it to keep winning. That is a fair reason to own some of a company, and a weak reason to let one company set the household’s retirement date.
- Taxes. Selling shares held for more than one year creates a long-term capital gain, taxed at 0%, 15%, or 20% depending on income. (IRS Topic 409) A 3.8% net investment income tax can apply on top once a couple’s income passes $250,000, or $200,000 for a single filer. (IRS Topic 559) The tax is real, and it is a fraction of the gain, and the gain is a fraction of the position.
- Restrictions. Unvested shares cannot be sold, and insiders face blackout windows and company trading policies. These shape the schedule; they do not remove the decision.
- Sentiment. The stock came from a parent, or from decades of work. A household can honor the source of its wealth without staking the whole plan on one ticker.
Each reason points to a different planning action. Belief argues for a deliberately sized position. Taxes argue for a schedule. Restrictions argue for a plan filed in advance. Sentiment argues for keeping a meaningful piece and freeing the rest.
Five questions that turn a holding into a decision
Purpose
What is this position for? The honest answers are few: it funds the household’s retirement, it is a legacy for the next generation, or it is a bet the household can afford to lose. Each answer implies a different size.
Size
We express the holding as a share of everything the household has invested, then ask one question. If this stock fell by half, would the plan change? The largest share that still earns a “no” is the ceiling. That number belongs to the household — not to whatever the market happened to make it.
Schedule
A position rarely comes down in one trade. A schedule spreads sales across tax years, lines them up with vesting dates and lower-income years, and removes the temptation to guess at the price. For directors and officers, a written plan under SEC Rule 10b5-1 fixes the schedule in advance. Since the SEC’s 2022 amendments, that plan cannot trade until at least 90 days after adoption, and never more than 120. (SEC, Rule 10b5-1 amendments, Dec. 14, 2022)
Tax cost
The tax is owed on the gain, not on the sale. Round numbers make the point: a household holds $1,000,000 of one stock and paid $250,000 for it years ago.
| Illustrative · federal only | Amount |
|---|---|
| Value of the position | $1,000,000 |
| What was paid (cost basis) | $250,000 |
| Long-term gain if all of it is sold | $750,000 |
| Federal tax at the 15% rate | $112,500 |
| Federal tax at 20% plus the 3.8% surtax | $178,500 |
| Kept by the household after the sale | $821,500 to $887,500 |
Illustrative. Not a recommendation. State tax, other income, and the year of sale all change the result. The point survives every variation: the tax touches part of the gain; the risk of holding touches all of it.
Hedges and gifts
Some of the position may not need to be sold at all. Shares held more than one year and given to a charity are generally deductible at full market value, and the built-up gain is never taxed. For most charities the deduction is limited to 30% of adjusted gross income in a year. (IRS Publication 526, capital gain property) Gifts to family work differently: the recipient takes over what the giver paid, so the gain travels with the shares. (IRS Publication 551, property received as a gift) For 2026, the first $19,000 given to any one person is excluded from taxable gifts. (Rev. Proc. 2025-32, §4.42) Hedging arrangements exist for very large positions. They add cost and complexity, and belong in a conversation about a specific holding.
The equity-compensation cases
Restricted stock units
Shares delivered under a restricted stock unit are pay. Their full value on the day they vest is ordinary income, and that value becomes what the holder paid for the shares. (IRS Publication 525, restricted property) Selling on the vesting date therefore creates almost no additional tax. A position that keeps growing after each vest is a decision to buy the employer’s stock with after-tax wages.
Incentive stock options
Exercising an incentive stock option creates no regular taxable income that year. But the gap between the market price and the exercise price is an adjustment for the alternative minimum tax. (IRS Publication 525, statutory stock options) To sell the shares as a long-term gain rather than ordinary income, the holder must keep them until the later of one year after exercise and two years after the grant. For 2026, the AMT exemption is $140,200 for a couple filing jointly and $90,100 for a single filer. (Rev. Proc. 2025-32, §4.10) Exercise timing and sale timing are two decisions on two clocks.
Employee stock purchase plans
Discounted shares from an employee stock purchase plan follow the same holding-period rule: sold early, part of the result is ordinary income. (IRS Publication 525, statutory stock options) A household that keeps buying through the plan and never sells is building a concentrated position one paycheck at a time.
Inherited stock
Stock inherited from a parent takes as its cost the market value on the date of death. (IRS Publication 551, inherited property) The gain built up over the parent’s lifetime is never taxed, which makes inherited stock the least expensive concentrated position to reduce — and often the hardest. Sentiment, not tax, is doing the work here, and it helps to say so.
What this does not mean
Nothing here is a recommendation to sell any stock, exercise any option, or make any gift. The research describes the spread of outcomes across tens of thousands of companies; it says nothing about any one of them. A household with a large position may reasonably keep part of it for a long time. Our job is to make the size, the schedule, and the tax cost explicit, so that holding is a decision rather than a default.
Frequently asked questions
How much of a portfolio in one stock is too much?
Neither the tax code nor the research sets a number. We frame it as the share a household could watch fall by half without changing its plans. For a family whose retirement depends on the money, that share is usually smaller than the market has built.
If we sell, is the tax owed on the whole amount?
No. Tax is owed on the gain: the sale price minus what was paid. Shares held more than one year are taxed at 0%, 15%, or 20%, plus the 3.8% surtax above the income thresholds. Inherited shares start with a fresh cost at the date of death.
Should we wait for a lower-income year to sell?
Sometimes. A year with less earned income, or the gap between retirement and required withdrawals, can hold more of the gain at the 15% rate. The trade-off is that the whole position stays exposed while the household waits. Selling a slice each year captures much of the benefit.
Can a position be reduced without selling?
Partly. Appreciated shares held more than one year can go to a charity at full value with no tax on the gain. Shares given to family carry the giver’s cost with them. Hedging arrangements exist for very large holdings and carry costs of their own.
Sources and further reading
- Bessembinder, H. (2018). Do stocks outperform Treasury bills? Journal of Financial Economics, 129(3), 440-457
- IRS Topic no. 409, Capital gains and losses (see also Topic no. 559, Net investment income tax)
- IRS Publication 525, Taxable and Nontaxable Income (statutory stock options; restricted property)
- IRS Publication 551, Basis of Assets (inherited property; property received as a gift)
- IRS Publication 526, Charitable Contributions (capital gain property)
- IRS Rev. Proc. 2025-32, 2026 inflation adjustments (annual gift exclusion; AMT exemption)
- SEC press release 2022-222, amendments to Rule 10b5-1 (Dec. 14, 2022)
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The views and opinions expressed here are those of The Financial Sciences Company as of the publish date and are provided for informational and educational purposes only. They are not personalized investment, tax, or legal advice. The Financial Sciences Company, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Additional information is available in our Form ADV at adviserinfo.sec.gov.
General educational information, current as of 2026. Figures and rules change. For guidance specific to your situation, speak with a qualified professional.