If a large share of your net worth is tied up in a single stock, you probably arrived here in one of three ways. You’re a founder or early employee who took equity for years and never got around to selling it; you’re an executive whose RSUs and options outgrew the rest of your portfolio; or you sold a business and retained a rollover stake or earned out into stock.
All three paths arrive at the same conclusion: a single company’s performance now determines much of your financial future. You built your wealth to eventually fund something: a retirement, a next venture, your family’s future. But as a concentrated position, you’re absorbing the full volatility of one company. One earnings miss, regulatory action, or bad quarter could permanently reset your net worth.
The good news is there are several strategies to diversify a concentrated position, and they don’t have to involve selling everything at once or absorbing a painful tax bill. However, no strategy can be set up overnight, and several only work if they’re arranged in advance and executed in the right order.
In this guide, we dive into the five key strategies to diversify: how they work, who they’re for, what to watch out for, and how to execute them.
Am I Overconcentrated?
When it comes to concentration, there’s an industry rule of thumb worth knowing. Once a single position reaches between 10% to 20% of your investable net worth, most advisors consider it concentrated enough to diversify through one or more of the strategies below.
If you haven’t run the numbers recently, it’s worth first calculating your current portfolio makeup and checking if your position meets this threshold.
Why Many People Don’t Diversify
Even when they know they’re overconcentrated, many people don’t diversify. A few factors tend to stop them.
The first is behavioral. Many people naturally feel an attachment to the stock that built their wealth and anchor to what it was once worth. It’s difficult to sell the thing responsible for your success, especially if it falls below the price it once traded at.
The second is taxes, specifically that the tax bill is assumed to be larger than it actually is. Between multiple vesting dates, exercised options with different cost bases, and potential AMT exposure (if you’ve exercised incentive stock options), most people don’t know their tax basis with precision. That uncertainty often makes the number in their head scarier than the actual cost and makes inaction feel safer than it is.
The third is that there’s usually no trigger to act. Without a target allocation and timeline, the plan to “sell some eventually” can keep getting deferred until an unexpected event forces it, like a market drop or a divorce.
For executives specifically, there’s a fourth, harder constraint: you may not be legally free to sell when you want to. Blackout periods and restrictions on trading while in possession of material nonpublic information mean the “right time” and the “allowed time” often don’t overlap. It’s exactly why several of the tools below exist.
How to Diversify a Concentrated Position
Broadly, there are five strategies available to diversify a concentrated position, and it’s important to view them as a set rather than five isolated tactics. Most thoughtful plans combine two or three executed in a specific order so they do not conflict. We list them in sequence below.
To make the strategies concrete and comparable, we apply them all to the same scenario: a position worth $10 million, with a cost basis of $1 million (a $9 million embedded gain). At a combined federal and state rate of roughly 35% for a high earner, an outright sale would generate a tax bill of about $3.15 million, leaving roughly $6.85 million.
1. Check QSBS Eligibility
If your stock qualifies, this single strategy can be worth more than every tactic in this guide combined. The Qualified Small Business Stock (QSBS) benefit lets you exclude qualifying gain from federal tax entirely. Three things generally have to be true for your shares to qualify:
- You received the stock directly from the company — not secondhand from another shareholder.
- The company’s total assets were under $50 million at the moment your shares were issued to you.Â
- You’ve held the shares for at least five years.
If your shares meet these tests, the practical effect is significant: you can sell some or all of the position and reinvest the proceeds into a diversified portfolio immediately, without owing federal tax on the gain up to the exclusion cap of $10 million (or 10x your basis, if greater).
It’s important to note that the One Big Beautiful Bill Act made QSBS acquired after July 4, 2025 more generous. A tiered schedule replaced the old all-or-nothing five-year holding requirement: you can exclude 50% of gains after three years, 75% after four, and 100% after five. The per-issuer exclusion cap rose from $10 million to $15 million (or 10x your basis, if greater), and the company-size threshold for eligibility rose from $50 million to $75 million in gross assets at issuance. Stock acquired on or before July 4, 2025 is still governed by the old rules.
Who this is for: Founders and early employees who received stock from the company while it was still small
In our example: If the full $9 million of gain qualified and the five-year holding period were met, both the old $10 million and new $15 million exclusion cap would cover it entirely. That’s a $0 federal tax bill on a sale that would otherwise cost $3.15 million.
What to watch for: Eligibility depends on several facts about the company and several later strategies can destroy it. That’s why the question of QSBS eligibility should be addressed before anything else on this list.
How to implement: Confirming QSBS eligibility isn’t something you can complete independently because it relies on company-level facts you don’t hold. A wealth advisor can help coordinate: they can request appropriate documentation from the company, bring in tax counsel to evaluate them, and build a sale strategy tailored to your situation. Start early: gross assets at issuance are difficult to reconstruct years after the fact.
2. Hedging Without Selling: Collars and Variable Prepaid Forwards
For those who want downside protection without selling, collars and variable prepaid forwards (VPFs) can help. They’re particularly useful for executives as a large sale by a senior insider can be read by the market as a loss of confidence in the company, even when the trade is fully permitted.
A collar involves buying a put to protect against a decline while selling a call to fund it, letting you lock in a value range without selling. A VPF goes further: a bank pays you a substantial share of the position’s value in cash upfront (commonly between 75% to 90% of current value) in exchange for delivering shares, or their cash equivalent, at a set date years out, at which point the sale and any tax is finally recognized.
The question is whether you need cash now. If you only want protection against a drop, a collar is simpler, cheaper, and doesn’t involve pledging your shares. If you need liquidity — for example, to diversify into other assets, fund a purchase, or make an investment — a VPF provides it without a current taxable sale, at the cost of a more complex and expensive structure.
Who this is for: Executives, directors, and employees who hold a large position in a public company typically with an options market
In our example: A collar might set a floor around $8.5 million and a cap around $11.5 million, protecting against a drop below the floor while allowing gains up to the cap, with no tax due today. A VPF on the same position might generate roughly $7.5–9 million in cash now, years before any tax is owed on the eventual settlement.
What to watch for: For collars, hedge too tightly (set too narrow a gap between floor and cap) and the IRS can treat the position as a constructive sale under Section 1259, taxing you as though you sold outright while you’re still holding the stock and paying for the hedge. There’s no bright-line safe harbor in the statute, but collars are generally structured with a meaningful spread (often 80% to 120% of value at inception) to stay clear of that line.
VPFs carry the same constructive sale exposure, plus their own. The IRS has challenged VPF arrangements where the taxpayer did more than simply enter the forward, most notably where pledged shares were also lent out to the counterparty. The structure also pledges your shares as collateral, which means they can’t simultaneously be contributed to an exchange fund. And because the eventual settlement triggers the tax you deferred, a VPF postpones the bill rather than reducing it.
How to implement: Both structures are executed through a private bank or brokerage derivatives desk, not a standard brokerage account, and both typically require a position of $1 million or more. A wealth advisor can help determine whether hedging is appropriate, size the structure against your broader plan, pressure-test the terms a bank proposes, and confirm the design doesn’t compromise QSBS or a future exchange fund contribution, and coordinate execution.
Expect several weeks between starting the conversation and having a structure in place. Many company insider trading policies restrict or prohibit hedging outright, and where permitted, the hedge may need to be adopted outside a blackout window and publicly disclosed. Check your company’s policy before doing anything here.
3. Diversifying Without a Sale: Exchange Funds
This is the closest strategy on this list to actually solving concentration, rather than managing around it, without triggering an immediate tax bill.
An exchange fund pools your stock with other concentrated holders’ positions into a single vehicle in exchange for a share of the diversified whole. You end up owning a proportional share of a diversified basket instead of one stock, which directly fixes the underlying risk rather than just hedging it.
Who this is for: Holders of a large public position who don’t need access to that capital for at least seven years and meet the qualified purchaser threshold (generally $5 million or more in investable assets)
In our example: Contributing the full $10 million position avoids the $3.15 million tax bill today. You achieve diversification without an immediate tax bill and the ability to keep the full $10 million compounding rather than the $6.85 million left after an outright sale. You’d owe tax on the gain whenever you eventually sell.
What to watch for: This is a poor fit if you may need liquidity or are eligible for QSBS — contributing shares to the fund is a disposition of them Current rules require a seven-year holding period before redemption without triggering the deferred gain. Most funds require qualified purchaser status and minimums typically start between $500,000 and $1 million. And exchange funds generally won’t accept shares already hedged or pledged as collateral, so this has to happen before a collar or VPF.
How to implement: Access comes through a wealth manager or private bank with existing exchange fund relationships. It’s not something you can buy on your own. Because funds cap how much of any single stock they’ll accept, popular positions can close to new contributions, so it’s worth exploring early on.
4. Direct Indexing: An Ongoing Offset Engine
Direct indexing applies to the rest of your portfolio, not the concentrated position itself. It’s what makes selling down the position over time cheaper than it would otherwise be.
Instead of owning an index fund, you own the individual constituents directly, which lets losses be harvested stock by stock, generating a steady stream of losses that can offset the gains you realize as you sell the concentrated position down in parallel.
Who this is for: Anyone with a meaningful taxable portfolio alongside the concentrated position — particularly if you plan to sell the position down over several years. It’s least useful if nearly all your wealth is in the single stock, since there’s little else to harvest from.
In our example: Industry data puts realistic annual tax alpha from this kind of ongoing harvesting in the range of 1% to 2% of the indexed portfolio’s value for investors who have real gains to offset. That’s meaningful, compounding help against the gains generated by a multi-year selldown. It’s a supplement to the other strategies — not a replacement.
What to watch for: Harvested losses lower your basis in the replacement securities, embedding a future gain. The benefit is real but partly a deferral, and it’s largest when paired with gains you’re realizing anyway. Harvesting also has to avoid wash sale violations across every account you hold, including your spouse’s.
How to implement: This typically requires a wealth advisor or a direct indexing platform. It runs through a separately managed account, typically with a minimum in the low hundreds of thousands of dollars, and the results depend on daily or near-daily scanning for harvesting opportunities. The coordination that makes it valuable — sequencing harvested losses against the gains from your selldown — is often an advisory function rather than a platform feature.
5. Structured, Compliant Selling: 10b5-1 Plans
A 10b5-1 plan allows you to sell on a schedule without the legal risk that stops most insiders from acting. You commit to a plan while you’re clean of material nonpublic information, and it then executes automatically, including during blackout windows you’d otherwise be barred from trading in.
Who this is for: Officers, directors, and employees of public companies who are subject to insider trading restrictions
In our example: A plan might sell $1–2 million of the position per quarter over roughly a year, structured to bring the holding down to a target allocation on a defined schedule.
What to watch for: Officers and directors face a mandatory cooling-off period of 90 to 120 days after adopting or modifying a plan before the first trade can execute. Other employees face a 30-day cooling-off period. The plan has to be adopted while you’re outside a blackout window, which means setting it up well before you need it, and modifying or canceling a plan resets the cooling-off clock, so this works best as a firm commitment, not a placeholder you adjust opportunistically.
Your company’s insider trading policy defines its open and closed trading windows, and your general counsel or compliance officer can tell you the current schedule. The window typically opens a day or two after quarterly earnings are released and closes a few weeks before the quarter ends. Two cautions: an open window is necessary but not sufficient, and you can’t adopt a plan while you personally hold material nonpublic information, even during an open window.
How to implement: The plan is adopted through your company’s legal or compliance team and executed by an approved broker, and it must specify fixed amounts, prices, or formulas to qualify for the rule’s protection. A wealth advisor can help shape the plan by determining the target allocation, setting the pace of sales against your tax picture and cash needs, coordinating the timing with harvested losses from a direct indexing portfolio, and working alongside company counsel to get it adopted in a valid window.
Three Takeaways
Three things are worth taking away from this guide.
The first is that concentration is a risk you’re not being paid to hold, and time doesn’t reduce it — it just gives eligibility requirements more chances to lapse.
The second is that tools to diversify exist, but they interact in ways that are difficult to anticipate without assessing them together, which means holding your basis, holding periods, company trading policy, liquidity needs, and cross-eligibility in view simultaneously.
The third is that none of these are self-serve. Each one runs through a different gatekeeper, whether that’s tax counsel, a derivatives desk, an institutional relationship, or your company’s legal team, and knowing which to pursue requires understanding how each one affects your eligibility for the rest.
For these reasons, it’s worth mapping a holistic diversification strategy with a wealth advisor who can assess how these tools fit together for your specific situation and coordinate the parties required to execute them.