How to diversify concentrated wealth

Concentrated wealth can put your portfolio at risk

As the name suggests, concentrated wealth occurs when a disproportionate share of your net worth is held in a single, or limited number, of assets. While that can sometimes magnify your results, it can also leave you vulnerable and cause liquidity issues if your primary asset underperforms or significantly declines in value.

Concentrated stock positions are just one potential source

Concentrated wealth is more common than you might think. It often happens to workers who receive shares of company stock through restricted stock units, stock options, or an Employee Stock Purchase Plan that appreciate over time. (Like all equity investments, these shares are subject to market risk and may lose value.) It’s also a frequent problem among business owners who have most of their net worth tied up in their company, homeowners who have seen their property values skyrocket, and investors who purchased (or inherited) long-held positions at a low cost basis.

Watch for overlapping funds

Many investors assume they are diversified because they own multiple mutual funds or exchange-traded funds. But if these funds invest in the same underlying securities, they can create hidden concentration risk. Evaluating the underlying holdings—not just the number of investments—can help ensure a portfolio is genuinely diversified across asset classes, sectors, and risk exposures.

Real estate risk requires unique solutions

Real estate concentration is an often underestimated risk. A property portfolio that represents the majority of net worth is subject to geographic risk, liquidity risk, and market risk. To offload some of that risk, consider using a 1031 exchange to defer gains on investment property sales, a DST (Delaware Statutory Trust) to transition from active to passive real estate ownership, or UPREIT (Umbrella Partnership Real Estate Investment Trust) structures for large portfolios. The most important thing is to make sure you evaluate your real estate holdings within the context of your overall wealth and financial plan.

Barriers to diversification

While the risks associated with concentrated wealth are well known, many people—even savvy investors—are often reluctant to correct it. In most cases, there are two main reasons why people are reluctant to diversify their assets:

• Tax repercussions: Selling a highly appreciated asset can trigger capital gains and other taxes that may significantly reduce your returns.
• Emotional attachment: Liquidating inherited or long-held assets can be difficult because it often feels like you are losing part of your identity, disappointing your loved ones, or saying goodbye to a trusted parter or friend.

Working with a financial professional can make it easier to overcome these obstacles. By providing clear and objective guidance, they can help you put together a diversification plan that balances both financial and personal considerations.

Potential tax-diversification strategies

Fortunately, there are a variety of proven, efficient ways to diversify your assets and minimize concentration risk. The goal of diversification is not to maximize returns, but to reduce the likelihood that a single asset will derail your financial plan. Of course, not every strategy is right for everyone and it’s important to consult your tax professionals before deciding on a course of action.

• Systematic selling: Gradually sell portions of a concentrated position over time to spread capital gains across multiple tax years.
• Tax-loss harvesting: Realize losses elsewhere in the portfolio to offset gains generated by sales.
• Charitable planning: Structures such as donor-advised funds and charitable remainder trusts allow appreciated assets to be sold without triggering immediate capital gains taxes, while supporting philanthropic goals.
• Exchange-Traded funds: Eligible investors may be able to contribute a concentrated position to an exchange-traded fund in return for a more diversified pool of assets.
• 10b5-1 plans: Executives subject to trading restrictions can establish stock-sale programs that offer a structured path toward diversification.

Life insurance as a diversification and risk management tool

Cash value life insurance can help diversify concentrated wealth by providing tax-advantaged liquidity that is not directly tied to market performance. Since the cash value can be accessed to help meet cash flow needs during market downturns, it can reduce the need to sell investments at depressed prices.¹ And because the death benefit is generally paid income tax-free to beneficiaries, life insurance can be an efficient way to transfer wealth to your heirs or to help business owners fund their succession plans.

Knowing when it’s time to diversify

So now that you know what causes concentrated wealth and what the risks can be, it begs the question: How much concentration risk is too much? While there is no universal threshold for how much concentration risk is too much, it may help to ask yourself the following questions:

1. What percentage of my net worth is tied to this asset?
2. What would a 50% decline mean for my financial security and long-term goals?
3. Is the tax cost of diversifying greater than the risk of holding on to the asset?
4. How much time do I have to offload some of the risk?
5. What role does this asset play in my estate plan?

These questions provide a practical framework for evaluating concentration risk and starting a productive conversation with a financial professional and, where appropriate, a tax specialist.

How to diversify concentrated wealth FAQs