Managing Concentrated Positions Through a Goals-Based Framework

Portfolios with a concentrated stock position are subject to higher risk than more diversified portfolios. There are three main strategies for managing concentrated position risk: 1) monetizing the concentrated position through outright sales; 2) gifting the concentrated position to other individuals or charities; and 3) diversifying or hedging the concentrated position through various investment strategies. Using a goals-based wealth management framework, this article leverages Monte Carlo analysis to model the various concentrated position risk reduction strategies for a sample high-net-worth investor. The analysis projects future returns and the probability of the investor reaching their financial goals quantified as “probability of success.” The modeling results are compared to a base case of the investor maintaining their concentrated position. The article aims to demonstrate through sample investors how others can efficiently reduce a concentrated stock position based on their unique situation and goals. It also outlines the advantages and disadvantages of various strategies.