Helpful actions you can take to reduce concentration risk in your portfolio

Investors seek investments that will grow over time, but when a single stock significantly outperforms other holdings, it can come to represent a large share of a household’s portfolio. This concentrated stock position can increase risk, sometimes without the investor realizing it.

Concentrated positions are a concern because stocks inherently carry market risk. You could lose a large portion—or even all—of your investment, which would have an outsized effect on your household’s overall portfolio in the case of a concentrated position. While diversified portfolios still carry market risk, they help reduce company‑specific risk.

What is a concentrated stock position?

There is no set definition for a concentrated position, but T. Rowe Price generally considers a single stock holding above 5% of a portfolio worth addressing, particularly when it involves company stock. Holdings above 10% represent greater risk and typically warrant more immediate planning. In client conversations, we see a fair number of people who have 20% or more of their portfolio invested in a single company, a level that can materially increase portfolio risk.

Concentrated positions often arise through employer stock accumulated via retirement plan contributions, stock options, or restricted stock awards. Because investors may rely on the same company for both income and investment returns, concentration can increase the risk of financial loss if the company encounters difficulties. Other common situations include a single stock significantly outperforming the broader market and positions acquired through inheritances, trusts, or estates.

Managing this risk begins with regular monitoring, including:

• annual reviews of individual stock holdings,
• evaluations of household portfolios for overlapping positions, and
• reassessments following major financial events such as stock grants or inheritances.

Where concentration risk can hide

This risk is generally less common among mutual fund and exchange‑traded fund (ETF) investors because these vehicles provide diversification across many companies. However, investors with a significant allocation to any single fund should still monitor their portfolios for concentration risk. It’s possible to have higher‑than‑expected exposure to a single company, sector, asset class, or geographic region, either within a fund or when there is significant overlap in the holdings of various funds.

For example, as of May 30, 2026, Amazon represented 42% of the S&P 500 Consumer Discretionary Index. Therefore, if you owned a fund based on that index and it accounted for more than 12% of your total portfolio, your overall exposure to Amazon was more than 5%. That is not an isolated example—three of the 11 major S&P sector indices include a stock representing at least 20% of the index. Even in the broad S&P 500 Index, there were three stocks that represented more than 5%: technology companies Microsoft, NVIDIA, and Apple. A portfolio entirely invested in a fund tied to that index is not without concentration risk.

The simple fix for a concentrated position is to trim the position to below a target threshold such as 10%. But resolving a concentrated holding—especially an employer’s stock—may not always be that easy. In addition to tax considerations and the psychological challenge of selling any winning stock, there are real and perceived limitations specific to selling employer stock.

Overcoming roadblocks to diversification

Emotions can also make it difficult to act. Investors may hesitate to sell a rapidly appreciating stock, a company they strongly believe in, or a large, established company they view as particularly secure. Retirees may be reluctant to reduce holdings that generate a steady stream of dividend income. These factors can make it harder to address a concentrated position despite the risks involved.

For each source of hesitation in trimming a concentrated position, there is another way to think about the situation:

Concerned about taxes? Consider that a large price decline in one holding could have a far greater negative impact on your portfolio value than the tax liability on the gains of the shares you choose to sell.

Confident in the future growth of that large‑cap stock? Unfortunately, the stock market is littered with names that were once titans of their industry and yet rapidly lost their value.

Worried about losing out on dividends? Know that dividends are just one way to generate returns, and it’s important to consider the total return of a portfolio. Also, dividend‑paying stocks do not necessarily provide a greater buffer against price declines than non‑dividend‑paying stocks and can still lose value.

Diversify against outsized impacts

Ultimately, the decision comes down to how a dramatic decline in the stock price of a concentrated holding would affect your portfolio and financial plan. In the example in Figure 1, the investor starts with a $200,000 investment in a single stock. If she chooses to trim the position by 25% and diversify her portfolio, she would be better positioned for a market decline that disproportionately affects that stock. After the market decline, her portfolio will have a value $9,600 greater (even before accounting for potential taxes) than if she holds the full position in a single stock. Her portfolio may also be better positioned against risk going forward.

Once you’ve recognized that you have a concentrated position in your portfolio and are ready to act, consider the following steps. Some steps are accessible to all investors, while others require a level of technical expertise that makes them better suited for more complex situations.

Five ways to reduce a concentrated stock position:

1. Stop reinvesting dividends. While not the biggest step you can take, choosing not to reinvest helps slow the growth of the concentrated position.
2. Estimate capital gains and build a tax‑aware selling plan. Consult a financial professional to assess the tax implications of a concentrated position and develop a tax‑efficient plan for selling shares. This may include establishing a capital gains “budget” to spread tax liability over multiple years as the position is reduced. Inherited concentrated holdings may be easier to address because the step‑up in cost basis can allow shares to be sold with little or no capital gains tax.
   
   You may be pleasantly surprised by how low today’s capital gains are and by how easy a systematic unwinding of a concentrated position can be. By planning ahead, investors can potentially limit the gains subject to higher federal and state tax rates or the net investment income tax.
3. Make a plan for the proceeds before you sell. If you decide to sell a portion of the concentrated position, plan ahead for the proceeds. Consider reinvesting those assets in a diversified  ETF. By its very nature, this type of fund helps avoid concentrated positions by providing investors with exposure to the shares of many different companies. When evaluating ETFs, look for broadly diversified options that spread risk across a wide range of holdings, rather than those focused on a narrow sector or a small number of stocks.
4. Donate appreciated shares to charity. You can donate appreciated stock (generally held for a year or more) directly to a charity without triggering any capital gains for you or the charity. You can then deduct the full value of the donated securities (subject to limits). If you want to spread the donation over time, or the charity you have in mind isn’t well equipped to receive donations of stock, consider contributing to a donor‑advised fund. If the position was accumulated over time, work with a financial professional to identify the most advantageous specific tax lots to donate.
5. Gift shares to your heirs. You can reduce individual exposure to a concentrated position by gifting shares to family members, which may also support estate planning goals. However, gifts above the annual gift tax exclusion ($19,000 per recipient in 2026) may require filing a gift tax return and could have tax consequences. Unlike inherited assets, gifted shares do not receive a step‑up in cost basis, so recipients may owe capital gains taxes when they sell. A trust may also help facilitate the transfer process.

Regardless of the strategy used, the most important step is recognizing the risks of a concentrated position and taking action. The longer you wait, the larger the concentration might become, and it is hard to predict what tax rates might be in the future or how markets will move. Limiting concentration can help mitigate the risks associated with stock investing.

Advanced strategies for higher tax brackets

These tactics are more complex and could benefit from a discussion with a financial advisor.

1. Hedge with an options strategy. Investors can help limit the downside risk of a concentrated position by purchasing put options, which provide the right to sell a security at a specified price during a set period. However, options strategies require ongoing management and involve costs and tax considerations. Keep in mind that maintaining an options strategy involves ongoing attention, since options are defined for a limited period. Because of their complexity, only experienced investors should consider these strategies and should work with a financial professional to implement them.
2. Pool assets in an exchange fund. Exchange funds—not to be confused with ETFs—allow investors to contribute concentrated holdings to a pooled investment with other investors, potentially achieving diversification while deferring capital gains taxes. However, they often involve minimum investment requirements, lockup periods, significant fees, tax complexity, and no guarantee that a particular stock will be accepted if the fund already has sufficient exposure to that company or sector. While exchange funds can be useful in certain situations, many investors may find less complex strategies more appropriate.

Special considerations for company stock

This topic is especially relevant for employees who receive company stock through compensation programs or retirement plans. While they may benefit from the company’s success, they also risk quickly accumulating a concentrated position. The risk can be greater because both their income and a significant portion of their investments may depend on the same company. Here are some considerations when managing company stock positions:

• Blackout periods: There are periods of time when employees are not allowed to buy or sell company stock, often in the lead‑up to an earnings announcement. There are typically company‑specific processes for reporting and approvals that need to be followed. However, concentrated holdings usually develop over time, so managing the process and blackout periods should be possible with appropriate planning.
• Confidence in your employer: Believing in your employer may make it hard to fully appreciate how much the company’s share price could decline. Remember that a company and its stock are not the same. You can support your employer without maintaining the same exposure to its stock.
• Perceptions: You may be concerned that managers will view selling shares as a lack of commitment to the company. Some high‑level executives must report their holdings and transactions of company stock to the Securities and Exchange Commission (SEC), leaving them open to public scrutiny as well.
• Minimum holding requirements: Senior executives are often required to hold a minimum amount of company stock, such as one to five times their salary, and may be prohibited from hedging those holdings with derivatives such as put options. If you are subject to these requirements, they should be considered when deciding whether to reduce a concentrated position and when evaluating other ways to offset the added risk, such as reducing exposure to company stock or stocks in the same industry elsewhere in your portfolio.
• Net unrealized appreciation (NUA): If you hold employer stock in a qualified retirement plan, NUA may offer favorable tax treatment when shares are distributed in kind as part of a qualifying lump‑sum distribution. However, the potential tax benefit should not outweigh diversification needs. If company stock is already an outsized share of your portfolio—or you expect to keep accumulating shares through future grants, contributions, or many more years at the company—NUA should be one consideration, not the factor driving your strategy. Consult a tax professional before taking action.

Common questions about concentrated stock positions

How much of one stock is too much?
T. Rowe Price generally considers a single stock holding above 5% of a portfolio worth addressing, particularly when it involves company stock. Holdings above 10% typically warrant more immediate planning.

Should I sell company stock immediately?
Not necessarily. Review tax consequences, blackout periods, minimum holding requirements, and how the proceeds fit your asset allocation before selling.

How can I diversify a concentrated stock position tax‑efficiently?
Potential approaches include a staged selling plan, donating appreciated shares, gifting shares, or, in more complex situations, considering hedging or an exchange fund with professional guidance.

Can mutual funds or ETFs still create concentration risk?
Yes. A fund may have a large allocation to one company, sector, asset class, or region, and multiple funds can hold overlapping positions.