I have too much company stock. What should I do?

Having too much company stock can be a great problem to have. It can also become an expensive one if we handle it poorly.

If a large percentage of your wealth is tied to one stock, the obvious answer might seem to be: sell it and diversify. Maybe.

Before we sell anything, I want to understand how you acquired the stock, where you own it, what you paid for it, what selling could mean for taxes, when you need the money and how much concentration you're actually comfortable with.

The goal isn't simply to own less stock. The goal is to reduce unnecessary risk without creating unnecessary problems somewhere else.

What might this look like?

One executive may have $3 million of company stock in a taxable account with a very low cost basis. Selling everything tomorrow could create a significant tax consequence.

Another may own company stock inside a retirement plan, where a different set of planning opportunities may need to be considered.

A third may have $5 million in company stock but another $15 million spread across other assets. Their concentration looks very different from someone whose $5 million position represents nearly their entire net worth.

Same problem on the surface. Very different decisions underneath it.

How much company stock is too much?

I don't think a pie chart gets to make this decision for you. Instead, I want to know what would happen to your financial life if that company experienced a significant decline.

If the stock fell substantially at the same time your income, benefits or retirement were connected to the same company, would your financial plan still work?

That's a much more useful question than pretending one percentage is correct for everyone.

Should I sell my company stock all at once?

Sometimes. Sometimes not. Taxes, liquidity needs, risk tolerance and the rest of your balance sheet can all affect how we think about reducing a concentrated position.

I don't want taxes to be the only reason you keep a risk you no longer want. But I don't want to ignore the tax bill either.

What if I have a large capital gain?

A large unrealized gain doesn't make diversification impossible. It means taxes need to be part of the decision. Depending on the situation, we may evaluate timing, charitable goals, tax aware diversification and other approaches with the appropriate tax professionals involved.

What if my company stock is inside my 401(k)?

If appreciated employer stock is held inside a qualified retirement plan, there are circumstances where Net Unrealized Appreciation, or NUA, may deserve consideration before simply rolling the entire account into an IRA.

NUA isn't automatically better. But certain decisions can affect which options remain available. This is one of those situations where I want the question asked before the rollover happens.

What if I don't want to sell the stock?

Good. Then let's not begin by assuming you have to.

Maybe you believe strongly in the company. Maybe the stock has sentimental value. Maybe selling creates a tax issue. Or maybe you simply don't want to sell it.

My job isn't to win an argument with you about diversification. My job is to show you what the concentration means, what your alternatives are and what happens under different scenarios. Then you can make an informed decision.

A concentrated position is a risk to understand

A concentrated stock position isn't automatically a problem that needs to be eliminated. It's a risk that needs to be understood.

You don't need someone to tell you, “Sell the stock.” You need to understand what happens if you do, what happens if you don't and what options exist in between.