STOCK CONCENTRATION – A Thread
 
1. When evaluating a concentrated stock position, just how much is too much?  The topic falls in the same category as the ‘What’s Your Number?’ retirement question.  Which is, to say, sometimes as much art as science.

2. Our journey begins with an attempt to define what qualifies as ‘too concentrated'. Is it exceeding a certain % of one's portfolio? Or is it a % of their net worth? What percentage? 10? 20? More?  My head already hurts.

3. Let's go with this: a concentrated stock position is one that has the ability to jeopardize the present/future goals or financial independence of its owner through the position's negative performance. In other words, if your future is dependent on one position, it’s too much.

4. Put another way, if you wake up in the middle of every night to check the same stock's pre-market share price... you might be too concentrated.

5. Next, let's review some of the ways concentrated positions materialize.  For the sake of simplicity, we'll group them into two camps; not by choice and by choice.
 
Not by choice:
You own or work for a private company.

6. - You work for a public company and part of your compensation is stock on a future vesting schedule.  You are also granted stock options that cannot be exercised until a later date.
 
- You are set to inherit a large sum of money that's currently in a single stock.

http://7.In  these scenarios, you are not actively making a choice to take concentrated risk.

8. By choice:
 
- You buy a stock at the perfect time and choose to ride the roller coaster up as it hits new "multi-bag" milestones, growing to dominate your portfolio.  Looking at you, TSLA investors.

9.  - You work for a public company and receive vested stock as part of your compensation package. You also put a significant portion of your 401(k) into their common stock fund.

10. You are familiar and comfortable with the company and believe if they are smart enough to employ you, there's no reason why share prices should decrease.
 
In both scenarios, you are actively making the choice to be concentrated. Today, we'll focus on this.

11. Before we lay out what can be done, we need to first tackle how truly comfortable you are owning the concentrated position. For this exercise, let's borrow an item from "Men in Black", the neuralizer.

12. Your memory along with your cost basis have been wiped. Now, I'm going to give you the same amount of money you had in the position, in cash. Would you use ALL this cash to buy the same stock? 
 
The majority of the time, the answer is "NO," preceded by a four-letter word.

13. At last, here are a few options:
 
-Sell and reallocate
-Run a derivative strategy
-Borrow against a portion and diversify
-Make charitable gifts
-Utilize charitable trusts
-Consider an exchange fund (trade the stock tax free for a diversified basket of stocks)

14. Reminder, this is Twitter, not a white paper. There are many other options. The point is you aren’t stuck.

15. Each carries their own forms of risk, which we can discuss in greater detail in a future thread. What’s most important is to have a plan and see it through. Once you have an idea of what you want to accomplish, the rest becomes easier.

16. To get to your goals and stay there, take calculated risks to increase the probability of making your dreams a reality. Don’t fall in love with any one stock. I promise, it won’t love you back.