Fifty-Five Percent of Net Worth in One Employer's Stock
A client, 52, is a director at a listed logistics company and plans to retire at 60. Net worth is 1,900,000 USD: 1,050,000 of employer stock with a cost basis of 180,000, 350,000 in a target-date 401(k), 240,000 in cash, and 260,000 of home equity. She also receives 90,000 of restricted stock units a year until retirement. Household income is 330,000, taxable income about 280,000 after deductions, and spending is 110,000 after tax. She describes herself as a moderate investor but refuses to sell the stock because 'it has beaten the index for five years and I know this company'. Her risk questionnaire places her in a balanced portfolio, and she wants to leave 200,000 to a scholarship fund. She has asked whether she should sell everything now, sell gradually, or hold, and whether there is any way to reduce the risk without a large tax bill.
1. Distinguish the client's risk tolerance from her risk capacity and quantify the concentration risk.
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Tolerance and capacity point in opposite directions. Her questionnaire and stated preference say moderate/balanced, but her behaviour says otherwise: she holds a position whose volatility she has never had to live through in a downturn. Risk capacity - the ability to absorb a loss without abandoning the plan - is reasonably strong: eight years to retirement, spending of 110,000 against household income of 330,000, and a mortgage-free or low-leverage balance sheet. That capacity is exactly what allows her to take risk elsewhere, not what justifies concentration.
Concentration: 1,050,000 / 1,900,000 = 55% of net worth, and about 74% of her investable assets (1,050,000 of 1,640,000). A single-stock drawdown of 40% - unremarkable for an individual equity - would destroy 420,000, or 22% of total net worth and 26% of investables. A 60% decline, which happens to real companies, costs 630,000.
Hidden double exposure: salary, bonus and 90,000 of annual RSUs come from the same firm. If the company falters, her job, her unvested equity and her portfolio fall together - the classic correlation failure that a balanced portfolio is meant to prevent. That human-capital exposure probably exceeds the share position itself.
The reframe for the client: the choice is not between a good company and a diversified portfolio, it is between one uncompensated risk and a portfolio that still participates in the company's success through its index weight.
2. Design a staged diversification plan with tax estimates and the techniques you would use.
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Tax arithmetic: unrealised gain is 1,050,000 - 180,000 = 870,000. At her taxable income, long-term gains fall in the 15% bracket plus the 3.8% net investment income tax, so about 18.8%. Selling everything triggers roughly 163,600 of tax, plus possible state tax - a real but not prohibitive cost, and far smaller than a 40% position loss.
Staged plan (about five years):
- Sell RSUs at vest every year (90,000, minimal gain) - no tax reason to hold them, and this alone stops the position from growing.
- Sell 180,000-200,000 of the existing position each year, with basis allocated pro rata (basis about 17% of value), generating roughly 150,000-166,000 of gain and 28,000-31,000 of tax a year. Proceeds fund a diversified global equity/bond mix per the investment policy.
- Target a ceiling of 10% of net worth in the stock (about 190,000) rather than zero, so she keeps upside and emotional ownership.
Tax-efficiency tools:
- Donate appreciated shares to a donor-advised fund - up to 30% of AGI for appreciated property to a public charity, about 99,000 a year - which funds her 200,000 scholarship intention at a far lower after-tax cost than selling then giving cash.
- A charitable remainder trust if she wants income and a larger gift.
- An exchange fund or a collar/prepaid variable forward for temporary protection; note that a collar can be a constructive sale if too tight, and exchange funds lock capital for seven years.
- Do not gift shares to children - the kiddie tax and loss of basis step-up at death make it inferior to holding the taxable shares she keeps.
Sequence the sales around vesting dates and any trading windows; an automatic plan is essential.
3. What behavioural guardrails and investment policy provisions would you write to keep the plan on track?
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The problem is not analysis, it is adherence. Guardrails should be structural rather than motivational:
- Written policy statement with a stated maximum of 10% of net worth in any single security, a target allocation (for example 60/35/5), rebalancing bands of plus or minus 5 percentage points, and a named review date each quarter.
- Automatic execution: standing instructions to sell RSUs at vest and a pre-scheduled sale plan of a fixed number of shares on set dates, with authority delegated so that no decision is needed at the moment of sale. If she is a designated insider, put this in a Rule 10b5-1 plan adopted while not aware of material information.
- Separate the money: hold the residual company stock in a distinct 'legacy' account outside the retirement portfolio so it no longer distorts the rebalancing calculation, and label it as a concentrated position on every statement.
- Pre-commitment language: write down, now, what she will do if the stock falls 30% - the answer must be 'follow the plan', not 'buy more'.
- Decumulation bridge: confirm how the 110,000 of spending is met for the first five years of retirement from the diversified portfolio and pensions, so a stock collapse cannot force a sale at the bottom.
- Review triggers: a change in employment, a merger, or a fall below the 10% threshold prompt a scheduled meeting, not an ad hoc call.
Behavioural risk is the dominant risk here; the policy must remove discretion from the moment of stress.