The Hidden Risks of Holding Too Much Company Stock

Equity compensation is one of the most powerful tools for building wealth. Whether it’s Restricted Stock Units (RSUs), stock options, or Employee Stock Purchase Plans (ESPPs), company stock can turn into real wealth over time.

Even though equity compensation can accelerate wealth building, it also introduces a risk that’s easy to overlook, overconcentration. If too much of your net worth is tied to your employer’s stock, you may be putting your financial plan under strain.

Let’s dig into why overconcentration is so dangerous, what it means for your financial plan, and what smart strategies exist to manage that risk.

Why Holding Too Much Company Stock Is Risky

1. Volatility of a Single Stock: No matter how strong your company is, a single stock is far riskier than a diversified portfolio. A bad quarter, regulatory shift, or market downturn can cut your wealth dramatically in a matter of weeks. Even giants like Enron, Lehman Brothers, and more recently individual tech names remind us that no company is invincible.

2. Doubling Down on Career Risk: Your paycheck and benefits already depend on your employer. If your portfolio is also concentrated in the same company, you’re betting your career and your wealth on one outcome. A layoff combined with a stock price collapse can be devastating.

3. Psychological Attachment: Employees often feel emotionally tied to their company’s stock. Pride in your work can make it harder to sell, even when it’s the smart move. This “familiarity bias” is one reason employees often hold too much company stock for too long.

How Much Is Too Much?

Most advisors suggest limiting any single stock to 10–20% of your total investable assets. It's really dependent upon your personal risk tolerance and your goals! Beyond that, your portfolio becomes overly reliant on one company’s performance.

It’s worth noting that many clients I meet have 50%, or even more of their net worth tied up in their employer’s stock. They don’t always notice until we map out their full financial picture.

Tax-Efficient Diversification Strategies

The biggest challenge with selling company stock is often taxes. Fortunately, there are strategies to help reduce the burden:

Sell Gradually (Phased Sales): Spreading out sales over multiple years helps manage tax brackets. Insiders can use 10b5-1 trading plans to automate this process in compliance with SEC rules.

Tax-Loss Harvesting and Gains Budgeting: Losses in other parts of your portfolio can offset gains from company stock sales. Even if you don’t have losses in the same year, realized losses carry forward indefinitely, creating flexibility for future years.

Exchange Funds: If you have a large, concentrated position, certain pooled funds allow you to exchange company stock for a diversified portfolio without triggering immediate capital gains. These funds typically require you to hold for at least 7 years before redeeming.

Charitable Giving and Gifting: Donating highly appreciated stock to a charity or donor-advised fund lets you avoid capital gains tax while still receiving a tax deduction. You can also gift stock to family members in lower tax brackets.

Hedging with Options: Advanced strategies like covered calls or protective collars can help limit downside while deferring taxable sales. These require professional guidance but can be effective for very large positions.

Direct Indexing: This approach builds a portfolio around your concentrated position. It allows you to diversify while maintaining market exposure and incorporating tax-loss harvesting along the way.

Real-World Example

Imagine you’ve accumulated $800,000 in company stock through RSUs and ESPP purchases. At the same time, your 401(k) and brokerage account hold only $400,000 combined. That means two-thirds of your net worth is tied to your employer.

If the stock drops 40% in a downturn, you’ve lost $320,000 — and if the company also restructures, your income could be impacted too. Diversification doesn’t eliminate risk, but it spreads it out so one company doesn’t dictate your entire financial outcome.

Why Timing Matters

The right diversification strategy depends on:

• Your current tax bracket

• How long you’ve held your shares

• Whether you’re subject to insider trading restrictions

• Your broader financial goals

Selling everything at once could create a large tax bill, while waiting too long could expose you to market losses. A measured approach — and a clear plan — is usually best.

The Bottom Line

Company stock can be a powerful wealth builder but holding too much creates unnecessary risk. The goal isn’t to abandon your equity — it’s to balance it within a diversified, tax-smart financial plan.

If you’re sitting on a large position in your employer’s stock, now is the time to think about how it fits into your overall financial future. If you're interested in building a financial plan driven by purpose rather than products Book a free intro call here.

Disclaimer: This blog is for educational purposes only and does not constitute financial advice. Please consult with your advisor, tax professional, or mortgage lender before making a major purchase decision.