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.