The problem hiding inside the success story
Most concentrated positions are the by-product of having been right. A founder takes equity instead of salary; an executive accumulates restricted stock and options over two decades; a family rolls a business sale into the acquirer's shares. The position is not a mistake, it is a monument to a good decision. That is precisely why it is so difficult to dismantle, and why so many balance sheets we review carry sixty, seventy, sometimes ninety per cent of investable wealth in one line.
The financial point is unsentimental. The return a single stock has delivered is history; the risk it carries is the future. Roughly two-thirds of the volatility of a typical individual stock is idiosyncratic, specific to that company, and the market pays nothing to bear it. An investor is compensated for systematic risk, not for the avoidable risk of holding one name. A position that has compounded at twenty per cent for fifteen years can still surrender half its value in a single quarter on a product recall, a regulatory action, an accounting restatement or a founder's departure. The base rate is sobering: across long horizons a large share of individual stocks underperform cash, and the index's returns are carried by a thin minority of winners. Owning the past winner is not the same as owning the next one.
There is also an asymmetry that compounding obscures. A drawdown and a recovery are not symmetric: a 50 per cent fall requires a 100 per cent gain to return to par. For a client whose retirement, philanthropy and succession all rest on the same share certificate, the question is not the expected return of the holding but the dispersion of outcomes around it, and the consequences at the unfavourable tail.
What 'concentrated' actually costs
It helps to put numbers to the intuition. Consider a position worth EUR 20 million representing 80 per cent of a client's liquid assets. A diversified equity portfolio might be expected to show annualised volatility in the high teens; a single large-cap stock commonly runs at 30 to 45 per cent, and smaller or more cyclical names higher still. At 40 per cent volatility, a one-standard-deviation year spans a range of roughly plus or minus EUR 8 million on the position. The family's spending, gifts and commitments are being underwritten by that range.
The hidden cost is opportunity, not only risk. Capital locked in one name cannot fund the things the wealth exists to support: a foundation, the next generation's education, real assets, a margin of safety. We frequently find clients who feel wealthy on paper and constrained in practice, unable to commit to long-dated obligations because their liquidity is hostage to one share price and, often, to a trading window dictated by insider rules.
None of this argues for selling everything. The argument is narrower and, we think, harder to refute: once a single position can determine whether the family meets its core obligations, the marginal euro of concentration is being held for emotional or tax reasons rather than for expected return. Naming that distinction honestly is the beginning of the work.
The toolkit: reducing exposure without forcing a sale
The instinct to equate diversification with selling is what stalls most plans, because selling crystallises tax, signals to the market and, for insiders, may be impossible outside narrow windows. The practical toolkit is broader. A protective collar, buying a put and financing it by selling a call, brackets the position's value within a defined band for one to three years, capping upside in exchange for a floor. It changes nothing about ownership or voting and it buys time. For a recently sold business now held in acquirer stock, a collar can protect the proceeds through a lock-up.
Where the goal is genuine diversification rather than mere hedging, an exchange fund allows several concentrated holders to contribute their stock into a commingled vehicle and receive a pro-rata interest in the diversified pool, typically without triggering tax on the contribution, subject to a multi-year holding period. Charitable vehicles, a foundation or a donor-advised structure, let a client gift appreciated shares, secure a deduction and diversify inside the tax-exempt wrapper. Borrowing against the position can fund other investments or spending while deferring a sale, though it adds leverage to an already volatile asset and must be sized with a real stress test, not a complacent one.
Two simpler tools are often the most effective. A staged selling programme, disposing of a fixed percentage each quarter regardless of price, removes the impossible task of timing the exit and spreads the tax bill across years and rate bands. For executives still accumulating, a pre-arranged trading plan established during an open window allows automatic, scheduled sales that continue through subsequent closed periods, defusing both the behavioural and the compliance obstacles at once.
Sequencing: the plan matters more than the instrument
The tools are well known; the discipline to use them is not. We have seen sophisticated derivative structures put in place and then unwound at the worst moment because the underlying plan was never written down. The decisive variable is governance, not cleverness. A short, explicit diversification policy, agreed when the client is calm and the price is unremarkable, is worth more than any single trade.
That policy should state the target weighting and the date by which it will be reached, the order in which tools are deployed, and the triggers that accelerate or pause the programme. A sensible sequence often begins with protection where the risk is most acute, moves to tax-efficient diversification through charitable or exchange structures for the portion that can absorb a holding period, and uses a mechanical selling schedule for the remainder.
Crucially, the plan should be insulated from the price. The most common failure is the rule that quietly becomes conditional: 'we will sell when it recovers', 'we will wait for the product launch'. Each is a fresh forecast smuggled in under the language of patience. Pre-commitment, written and dated, is the antidote. It converts a series of painful discretionary decisions into the execution of a decision already made.
The counter-argument, taken seriously
The case against diversifying deserves a fair hearing, because it is sometimes correct. Concentration builds fortunes; diversification preserves them, and a holder with a genuine edge, deep operational knowledge, a board seat and no near-term need for the capital, may be giving up real expected return to buy comfort. The historical record is full of families who would have been poorer had they diversified early out of a great compounder. Survivorship makes those stories vivid.
Tax is the other honest objection. For a position with a very low cost base, the friction of a sale can be severe, and we do not dismiss it. But the answer is rarely to do nothing; it is to use the tools precisely designed to address it, collars and exchange funds and charitable gifts that diversify the economics while deferring or mitigating the tax, and to weigh the certain cost of tax against the uncertain but potentially total cost of an uninsured single-name failure.
The reconciliation is one of proportion. The first tranche of diversification, taking a position from ninety per cent to perhaps fifty, removes the existential risk at modest cost and is almost always justified. The last tranche, from fifty to twenty, is a closer call that turns on conviction, tax and the client's obligations. Treating these as the same decision is the error; they are not.
What this means for clients
First, separate the survival question from the upside question. Before debating how much of the stock to keep, identify the sum that must be protected to fund the family's non-negotiable obligations, retirement, succession, philanthropy, and remove that amount from the single name as a priority. What remains can be managed as a conviction bet; what is needed should never be.
Second, write the policy before you need it. A one-page diversification plan, with a target weight, a deadline, an ordered sequence of tools and price-independent triggers, should be agreed in a calm period and then followed mechanically. Pre-commitment, not prediction, is what gets the position reduced.
Third, match the instrument to the constraint. Use a collar where the immediate concern is a near-term fall and a lock-up or window prevents selling; use exchange funds or charitable structures where the cost base is low and tax is the binding constraint; use a scheduled or pre-arranged selling plan to grind down the remainder without timing the market. Our desks can model the after-tax and risk impact of each path against your specific holding and obligations.
Finally, judge success by the right test. The aim is not to outguess the share price but to reach the point where the family's plan is funded whatever the stock does next. When that condition is met, whatever remains in the position is owned by choice rather than by inertia, which is the only sound basis on which to hold it.
This note is house research and reflects the views of the Equities desk at the time of writing. It is not investment advice or an offer.
