A J.P. Morgan study covering 40 years of the Russell 3000 found that nearly 42% of individual stocks suffered an absolute negative return over the period. If a substantial share of your net worth sits in a single company’s shares, understanding this genuine risk – not just the paper valuation on your last statement – matters more than the number itself suggests.
Why “Rich on Paper” Genuinely Understates the Risk
Our Stock Loans page covers borrowing against a concentrated position specifically; this page focuses on why holding one is genuinely riskier than most people realise while the underlying company is performing well. It’s easy for a single position – often an employer’s own stock, built up through vesting, options, or a founding stake – to grow into 30%, 40%, or more of someone’s total net worth without a single deliberate decision along the way.
Even Good Years Carry Genuine Drawdown Risk
This is a genuinely striking, often overlooked fact: in 2023 and 2024, years when the S&P 500 rose more than 25% each year, 72% and 68% of individual stocks respectively still experienced a maximum drawdown of at least 15% at some point during the year. In the 2022 bear market, 96% of S&P 500 stocks had drawdowns of at least 15%, and 32% saw drawdowns exceeding 40%. It’s worth understanding this clearly: even a genuinely strong index year doesn’t protect an individual holding from a severe, if temporary, decline.
Where the Genuine Thresholds Sit
Most advisers consider a single position concentrated once it exceeds 10-20% of your overall portfolio. Between 20% and 30% is generally considered meaningfully concentrated, worth having a genuine diversification plan for. Above 40% is considered highly concentrated, warranting immediate attention. Above 50% in employer stock specifically is considered extremely risky – and it’s worth understanding why this specific scenario is genuinely worse than the numbers alone suggest.
The Genuine Double Jeopardy of Employer Stock
If your wealth is concentrated in the same company that also pays your salary, you’re facing a genuinely compounded risk most people don’t fully appreciate: both your income and your accumulated wealth depend on the same underlying business. A downturn, restructuring, or worse doesn’t just dent your portfolio – it can threaten your income at exactly the same moment, removing the very cash flow you’d normally rely on to weather the situation.
Why Diversifying Feels Harder Than It Should
Most investors delay diversifying a concentrated position specifically because of the tax implications – founders and early employees often hold genuinely low-basis stock, meaning virtually the entire value represents taxable gain. Our piece on stock loans vs selling shares covers this genuine tension in more depth, including why borrowing rather than selling can let you reduce your practical exposure without triggering the tax bill that often causes people to simply do nothing.
Using a Stock Loan to Genuinely Diversify Without Selling
Borrowing against your concentrated position and investing the proceeds into a genuinely different mix of assets achieves real diversification of your overall wealth, without the original holding itself ever being sold or its gain crystallised. Our Lombard Loans page covers building a genuinely diversified portfolio going forward, worth reading alongside this page if reducing concentration risk, rather than raising cash for a specific purchase, is your primary genuine goal.
Why Emotional Attachment Genuinely Complicates This Decision
It’s worth being honest that even when the numerical risks and diversification benefits are genuinely well understood, many holders remain emotionally attached to a concentrated position – particularly founders and long-serving employees who built the company or watched it grow. This attachment is a genuinely real factor worth acknowledging openly, rather than pretending the decision is purely mathematical.
Why This Applies to Genuinely Fresh Wealth Too
Major IPOs create this exact situation for employees and early shareholders almost overnight – a position that felt like ordinary compensation suddenly represents life-changing, but entirely concentrated, wealth. The genuine planning question shifts immediately from how to build wealth to how to preserve it, and it’s worth having this conversation early rather than waiting until a lock-up period has already ended.
How Margin Call Risk Genuinely Compounds With Concentration
If you’ve borrowed against a concentrated position specifically, our piece on margin call on a stock loan covers exactly how a single company’s price decline can trigger forced liquidation, worth reading alongside this page since concentration risk and margin call risk are genuinely two sides of the same underlying exposure – both amplified specifically because your collateral isn’t spread across multiple holdings.
There’s No Genuine One-Size-Fits-All Answer
An entrepreneur may deliberately remain concentrated to preserve control and long-term upside; a long-term investor may hold based on conviction and tax efficiency; someone who inherited a position may prioritise diversification and simplicity instead. Because concentrated stock positions genuinely intersect with taxes, liquidity, career considerations, and personal objectives, there’s no single correct answer that applies universally – it’s worth working through your own specific circumstances properly rather than following generic advice.
Getting a Genuine Plan in Place
Given how much genuinely depends on your specific concentration level, tax position, and whether your income also depends on the same company, it’s worth having a proper conversation about your realistic options before assuming the position will simply take care of itself. Our Securities Lending hub covers the full range of products worth considering as part of a genuine diversification plan. Get in touch with details of your portfolio, and we’ll help you understand your genuine options.
Frequently Asked Questions
At what point is a stock position considered concentrated?
Most advisers consider 10-20% of your overall portfolio the threshold where a position becomes worth actively monitoring, with 40%+ considered highly concentrated.
Why is holding employer stock specifically riskier than other concentrated positions?
Because both your income and your wealth depend on the same company, meaning a downturn can threaten your cash flow at exactly the moment your wealth is also declining.
Why do so many people delay diversifying a concentrated position?
Often due to tax implications – founders and early employees frequently hold low-basis stock where nearly the entire value represents taxable gain on sale.
Can I reduce concentration risk without selling and triggering a tax bill?
Yes – borrowing against the position and investing proceeds elsewhere achieves genuine diversification of your overall wealth without disposing of the original holding.
Do concentrated positions carry risk even in strong market years?
Yes, genuinely – even in years the broader index rose over 25%, the majority of individual stocks still experienced significant temporary drawdowns.
Get in touch with details of your portfolio and concentration level, and we’ll help you understand a genuine plan to manage this risk.
