Imagine it’s May 1997 and you decide to put $2,000 into a little-known online bookstore called Amazon. Or perhaps your parents bought the stock for you shortly after you were born.
Today, that original $2,000 investment would be worth approximately $4.28 million.
As unbelievable as it sounds, it’s entirely possible. Since its IPO, Amazon has generated a return of roughly 214,000%, earning a place among a very small group of stocks that have produced extraordinary wealth for long-term investors.
Owning a winner of that magnitude is every investor’s dream. Yet it can also create a surprisingly difficult problem: portfolio concentration risk.
As Kenny Rogers famously sang in The Gambler, “You’ve got to know when to hold ’em, know when to fold ’em.”
In investing, that means recognizing when a single position has become too large. If that $4.28 million Amazon stake represents 75% of your net worth, your financial future is heavily dependent on the fortunes of one company. A significant decline in the stock could have a major impact on your lifestyle and long-term goals.
Amazon may appear unstoppable today, but history offers plenty of cautionary tales. Companies such as Sears and General Electric were once viewed as dominant, nearly untouchable businesses. Over time, however, circumstances changed. Even great companies can stumble, which is why concentration risk remains one of the biggest threats to preserving wealth.
Experienced investors don’t ignore this risk—they actively manage it.
If the shares are held in a tax-advantaged account such as an IRA, the solution is relatively straightforward. You can sell the position, reinvest the proceeds into a diversified portfolio, and avoid immediate tax consequences.
The situation becomes more complicated when the stock is held in a taxable brokerage account.
In the Amazon example, selling the entire position would trigger millions of dollars in long-term capital gains. While many investors pay a 15% federal long-term capital gains tax rate, higher-income households can face a 20% rate plus the 3.8% Net Investment Income Tax (NIIT). Liquidating the entire position at once could therefore result in a substantial tax bill.
Fortunately, investors don’t have to choose between excessive concentration risk and excessive taxes. There are several strategies professionals use to gradually reduce exposure, diversify their holdings, and manage the tax impact more effectively.
Reduce Exposure Through Tax-Loss Harvesting
One of the most straightforward ways to manage concentration risk is by using market volatility to your advantage. Tax-loss harvesting involves identifying underperforming investments in your portfolio and selling them to realize losses that can offset gains from your highly appreciated holdings.
While this strategy may not completely solve the issue if a single stock dominates your portfolio, it can be highly effective when a position has gradually grown to represent 5%–10% of your net worth—a level often considered the threshold between a normal holding and a concentrated position. By consistently harvesting losses and trimming the position over time, investors can gradually diversify without triggering significant tax liabilities.
Transfer Shares to Family Members
For many investors, passing wealth to future generations is a key objective. Gifting appreciated stock to children or other family members can help reduce concentration risk while transferring wealth during your lifetime.
A crucial distinction exists between gifting shares during life and passing them on through an estate. Assets inherited after death typically receive a stepped-up cost basis, eliminating accumulated capital gains. In contrast, gifted shares retain the donor’s original purchase price.
However, if the recipient is in a lower tax bracket, they may be able to sell the shares and incur little or no capital gains tax. This allows the family to preserve more wealth while reducing the donor’s exposure to a single stock.
Donate Appreciated Shares Instead of Cash
If charitable giving is already part of your financial or estate plan, donating appreciated stock can be far more tax-efficient than writing a check.
By contributing highly appreciated shares directly to a qualified charity or a Donor-Advised Fund (DAF), investors may receive a tax deduction based on the stock’s full market value while completely avoiding capital gains taxes on the appreciation. In most cases, deductions for these non-cash contributions can be claimed up to 30% of Adjusted Gross Income (AGI).
Use a Charitable Remainder Trust (CRT)
For investors seeking a more sophisticated approach, a Charitable Remainder Trust can provide both diversification and ongoing income.
Appreciated shares are transferred into the trust without triggering immediate taxes. Since the trust is tax-exempt, it can sell the concentrated position and reinvest the proceeds into a diversified portfolio. The trust then distributes income to the investor for life or for a predetermined period.
Although taxes are eventually paid on the income distributions, the liability is spread over many years rather than being incurred all at once, creating a more manageable and tax-efficient outcome.
Consider an Exchange Fund
Among the most powerful diversification tools available to affluent investors is the exchange fund, though it remains relatively unknown outside wealth-management circles.
In an exchange fund, investors contribute concentrated stock positions into a pooled vehicle alongside others holding different stocks. For example, one investor may contribute Amazon shares, another Microsoft, and another Exxon. In return, each participant receives an ownership stake in the diversified pool.
Because this transaction is structured as an exchange rather than a sale, capital gains taxes are deferred. The result is an immediate reduction in single-stock risk and exposure to a broader portfolio of companies, helping protect investors from the impact of a sharp decline in any one stock.
Know When It’s Time to Diversify
As the famous line from The Gambler suggests, success often comes from knowing when to hold on and when to walk away. If a large, concentrated stock position is creating anxiety or exposing you to excessive risk, it may be time to take action. A thoughtful diversification strategy can help preserve the wealth you’ve worked hard to build while reducing the risk of a single investment undermining your financial future.
THE ETERNAL SOVEREIGN 
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