Investment Strategies
Avoiding Trap Of Portfolio Concentration Risk

The risk of having all one's "eggs in one basket" when it comes to stocks and other investments is often talked about, but not always easy to correct without triggering taxes and other costs. We talk to a firm that says its approach can help address the challenge.
(An earlier version of this article appeared late last week on Family Wealth Report, sister news service to this one. While the specific details apply to the US, stock concentration risk is a global issue for investors and other parties in developed and emerging market countries around the world. We hope readers find this information valuable.)
Private bankers and wealth managers will be aware by now – or
they should be – of the dangers of what is called
concentration risk.
If an investor holds a high percentage of equities or bonds in a
handful of firms such as the US “Magnificent Seven” (Nvidia,
Microsoft et al), it raises a risk of significant capital loss if
markets sink. (See a
related article on concentration risk from last December.) In
recent weeks, for example, we have seen sharp falls in the price
of electric car firm Tesla, and advanced chipmaker Nvidia. (In
the latter case, it got
hit hard by revelations that China’s DeepSeek AI app had, so it
was claimed, been developed for a fraction of what it has cost
peers in the US.)
If company staff have high exposures to their own corporate stock
in a retirement plan, that creates other problems. (One remembers
the case of 25 years ago at US energy firm Enron, where more than
half of its employees’ savings relied on Enron’s stock price –
which ended disastrously when the firm went bust.)
Srikanth Narayan, CEO and founder of Cache, an RIA fintech that
says it offers a tax-friendly way to handle concentrated stock
holdings, says there is a way out – swap funds. These funds,
sometimes also called exchanged funds, are an investment
vehicle that allows investors with large, concentrated holdings
in a single stock to diversify their portfolio without setting
off a taxable event by swapping those shares for shares in a
diversified fund. A problem in the past, however, is that
these funds require high minimums and fees, putting them beyond
the reach of ordinary clients. Exchange funds have actually been
around in some form since the 1930s, and firms such as Morgan
Stanley and Goldman Sachs operate in the area.
Narayan argues that his firm’s technology helps to make these
funds more widely available. In 2023, Cache launched the
Cache Exchange Fund, which expanded eligibility to
US accredited investors. The fund is set up to
approximate the holdings of the Nasdaq-100 index.
Family Wealth Report asked Narayan how large this stock
concentration risk is.
“Concentrated stock positions are often an under-recognised
challenge, partly because many holders aren’t fully aware of the
risks and the strategies available to mitigate them,” he
said.
“Publicly traded companies now spend over $350 billion annually
on stock-based compensation, with technology firms leading in
both absolute spend and per-employee stock awards. This trend
naturally produces employees and executives who accumulate highly
concentrated positions in their company’s stock over time,”
Narayan continued.
This problem has been accumulating, he said. “Since the beginning
of 2009, the Nasdaq-100 Index has appreciated roughly 16 times.
Individual tech giants like Nvidia have seen even more dramatic
growth – over 600x since 2009. Consequently, a modest
initial investment – say $10,000 in Nvidia – could now
exceed $6 million. These exponential gains fuel a high
concentration in a single stock position, creating a predicament
for investors who wish to lock in gains but worry about
triggering substantial capital gains taxes.
Narayan cites research from Goldman Sachs noting that more than
$8 trillion of highly appreciated securities remain in brokerage
accounts.
“This figure suggests a considerable portion of investors are
holding assets in a way that makes them reluctant to sell (and
pay taxes) even if diversification makes financial sense,” he
said.
“In practice, this challenge spans multiple investor
demographics: tech employees receiving generous stock-based
compensation, Baby Boomers who have held growth stocks for
decades, and executives with legacy holdings all face this issue.
Among the thousands of prospects we’ve encountered, the most
common reason for not diversifying is the concern over potential
tax liability. These investors often describe feeling `stuck’
because selling would incur significant taxes, yet holding on to
a single stock leaves them over exposed to sector or
company-specific risks,” Narayan continued.
Opportunity
Fixing this risk presents an opportunity, however.
“Concentrated stock positions and associated tax considerations
affect a broad demographic of HNW individuals. Given the surge in
equity values and the prevalence of stock-based compensation,
this is a sizable and growing issue in wealth management.
Advisors who proactively help clients navigate these complexities
with diversification strategies help to reduce client risk and
enhance long-term portfolio performance,” Narayan said.
There is great variety, he said, in the advice and work that
wealth managers do in helping clients with these risks.
“Some advisors are true specialists in equity compensation and
keep a close eye on concentration risk, suggesting strategies
like staged selling or using options to hedge big single-stock
positions. However, many advisors lack deep expertise in equity
compensation, leaving employees unaware that their growing
position might be a ticking time bomb,” Narayan said.
“One huge factor I’ve seen is the emotional tie employees have to
their company’s stock. Maybe they were there from the early days,
or they feel personal loyalty to the brand and mission. That
pride can be a double-edged sword – on one hand, it’s great
to believe in your company, but on the other, it can cause folks
to ignore the risks of having too much riding on one ticker
symbol.
“Most companies provide basic stock compensation education, such
as how to exercise options or set up a 10b5-1 plan, but few offer
individualised help to manage stock-based compensation and risk
management strategies. If an employer doesn’t proactively connect
them with an experienced advisor, many employees may not realise
how exposed they are until the market forces their hand,” Narayan
said.
There’s also a certain complacency that comes when a stock is
doing well, he said.
Many people only start asking about diversification after they
see a big drop – or when they need cash and realise selling
will trigger a massive tax bill. By then, options become more
limited, and tax burdens can be harder to mitigate – losing room
to manoeuvre,” he said.
“Overall, there are proactive advisors who help employees handle
concentrated positions thoughtfully – setting timelines,
building hedges, and mitigating the tax impact. Unfortunately,
the combination of limited guidance and a real emotional bond to
the stock often leads to inaction until a major price move or
life change forces a decision,” he said.
Narayan contrasted swap funds with other ways of optimising a
fund for various risks, including tax.
“Tax-loss harvesting, direct indexing, charitable trusts,
donor-advised funds – all those strategies aim to reduce or
offset capital gains when you sell appreciated stock. Exchange
funds (aka swap funds), on the other hand, offer a different
route: rather than selling your stock outright and realising a
taxable gain, you contribute it in-kind to a fund and receive an
ownership stake in a diversified pool of assets,” he added.