How to Turn Concentrated Stock Holdings into Income Generators

Having a large concentration of equity is one of those “good problems to have.” It means you’ve amassed significant wealth for you and your family. However, no matter how you obtained your large stock position, whether through company compensation, an inheritance or an IPO, holding such concentrated wealth can have impending consequences.

Just as you’d rent out a second home for rental income, there are certain strategies you can use to take those idle stocks and use them to generate income for you and your family.

Putting concentrated stocks to work for our clients is one of our specialties here at Watts Gwilliam and Company. Our team of financial advisors help clients turn these assets into income generators.

This can be a complex and intimidating process for the unexperienced, so our team of financial advisors in Gilbert put together this short overview of how – and why – this should be done.

Does your investment plan generate sufficient income? Minimize taxes and fees? Work for you; not your broker? Schedule a complimentary consultation with Watts Gwilliam and Company.

What Are Concentrated Stock Options?

“Concentrated equity” is defined as having at least 10 to 20 percent of your wealth in one specific stock. However, as with all rules of thumb, this is a generalization. What’s concentrated for you may be well-diversified for someone else. It all depends on the asset allocation you need to reach your financial goals.

For example, if having 5 percent of your wealth in a specific stock could risk your financial goals, it may be too concentrated. On the other hand, if you could easily hit all your retirement and legacy goals even with a 15 percent stock position, you may be just fine.

The Risks of Concentrated Wealth

Your concentrated stock holdings may have made you wealthy, but they won’t necessarily keep you that way. Here’s why.

When you have a large concentration of wealth in one security, you put all your eggs in one basket. Your overall wealth could significantly decrease if the price of the stock drops, the company experiences a few bad years, or worse, if the company goes bankrupt.

The Coronavirus pandemic and resulting financial crisis are clear examples of this.

Corporate giants like Norwegian Air, Briggs & Stratton, and Frontier Communications have all filed for bankruptcy, with many others following suit.

Companies like Carnival saw their stock prices go from $51 in January 2020, to $9.30 by March 2020. Nearly a year later, it’s still hovering around $20 a share.

This type of volatility adds significant risk to your portfolio. It puts your family’s future financial security at risk and can lead to major tax and liquidity issues if you ever need to sell.

If you’re in a position where major dips and swings in company stock would cause you to delay your retirement, it’s time to rethink.

Why It May Be Difficult to Say Goodbye to Your Stock Options

Even after you understand all the risks, it can be hard to say goodbye to your concentrated stock options. There are 2 main reasons for this: You may be emotionally tied to your stock or you may be legally bound to keep it.

Let’s take a look at both.

Emotional Reasons

Many people find themselves emotionally attached to their stocks and unwilling to part ways with them. Common reasons for this are:

• They helped build and establish the company they work for and believe the stocks will continue to grow in the future.
• They inherited the stock from a loved one who thought highly of the company, and so they may think they’re dishonoring their deceased loved one by diversifying.
• They’re afraid employees will think they have insider knowledge if they sell the stocks.

Legal Reasons

Each company creates its own rules and requirements for company stock. If you’re in a lock-up agreement, for example, you may be contractually obligated to keep your shares for a set period of time. You may also want to hold onto your shares if there’s a vesting period in place.

Regardless if your reasons are emotional or legal, don’t let them stop you from reducing the unnecessary risks brought on by concentrated wealth.

What it Means to Turn Stock Holdings into Income Generators

Turning your stock holdings into income-generating machines means you mitigate risks, reduce your tax burden and build long-lasting, generational wealth for you and your family.

Contrary to popular belief, it doesn’t mean that you have to sell all your shares outright (which could lead to large capital gains taxes).

There are many different strategies you can use to manage a highly concentrated stock position. Some of these include:

• Creating cashflows for stock that don’t currently pay a dividend
• Monetizing stock
• Gifting a stock to charity
• Hedging
• Using a stock protection plan

The list is long.

These strategies aren’t all-or-none approaches. Depending on your position, it may be best to implement a myriad of them to achieve the right results. Because of this, we recommend meeting with a financial advisor first. The financial advisors at Watts Gwilliam can help you dig into the fine print of your stock options to determine when and how you should go about diversifying your holdings.

The Importance of Working with a Professional

Talking with an experienced financial advisor about how you can turn your large stock position into an income generator may just be the best “next step” you can take toward securing your family’s wealth. As we’ve already established, overexposure in a certain stock is risky business and can often lead to:

• Liquidity issues
• Large tax bills if you sell at the wrong time
• Unnerving volatility that could lead to emotional investing

Work through these issues with our team of financial advisors. At Watts Gwilliam and Company, we specialize in this complex and often intimidating process, and can help you make wise decisions for you and your family.

Even if you have dividend-producing stock, there may be ways to reposition your portfolio so you continue earning the same income.

Let Us Help

At Watts Gwilliam and Company, we specialize in working with investors who have concentrated equity positions and are happy to review your situation with you. We’ve been doing this for many years and have several strategies we can implement based on your unique situation, goals, assets and tax environment.

Schedule a no-obligation conversation with our team. Together, we’ll weigh the pros and cons of your current stock position and help you put a plan in place to mitigate risks.