3 Strategies for Highly Appreciated Stocks

When you own a stock that's been soaring, it's natural to want to hang onto it—or buy even more shares to help boost your gains. But at what point does a highly appreciated stock become too much of a good thing?

Generally speaking, when one stock accounts for more than 10% of your investment portfolio, you may encounter concentration risk—the risk that a single asset may have a disproportionate amount of influence over your portfolio's overall performance. If the stock begins to struggle, your portfolio could struggle along with it.

Let's take a closer look at strategies to manage highly appreciated stocks and mitigate concentration risk.

Too much can definitely be a bad thing when it comes to particular stocks.

Concentration risk is when any single asset—or group of assets—comes to dominate the value of your portfolio. This can work in your favor when that asset is having a hot run. But should it falter, especially when you're focused on preserving your savings, the effect on your portfolio could be catastrophic.

Concentration risks can creep into a portfolio several ways. For example, you might acquire a large position in a single stock through equity compensation or an employee stock purchase plan. You could also find yourself overly exposed to certain mega-cap stocks via investments that track market cap-weighted indexes like the S&P 500^® Index.

How do you know when your concentration risks are mounting? In general, if a single stock accounts for more than 10% of your investment portfolio (or more than 20% if you are restricted from selling), your portfolio may be overly concentrated.

The next question becomes what to do about it. We suggest starting with a plan, in three steps:

1. Define your individual needs. On your own, or working with a professional advisor, understand your wealth and the role the concentrated position plays in your holistic financial picture.
2. Determine your objectives. Identify your priorities and the best path forward.
3. Develop strategic plan. Connect your objectives to the best solutions and actions for you.

In general, you have three options when determining your objectives: keep the stock but help protect against losses or generate income; sell the stock to unlock liquidity and/or diversify; or give the stock away to help build a legacy. You don't need to choose just one. A combination of all three may be a tax-efficient way to help achieve your goals.

You may have reasons for keeping a stock that dominates your portfolio. First, you may not have a choice: If the stock is part of your compensation package, sales might be restricted for a set period. Another common situation is to have a single stock appear in many different funds—particularly market capitalization-weighted funds that give a larger allocation to the market's biggest companies—which can lead a person who has invested in funds to inadvertently overinvest in a handful of stocks.

Whatever the case, if you're planning to keep your position, you could consider some ways to manage your risk and/or generate income to potentially offset any losses.

A stop order is an order to sell (or buy) a stock at the market price once the stock has traded at or through a specified price (the "stop"), which can help you manage the risk of prolonged slump in your concentrated shares.

In most cases, your stock will sell for close to the market price when a stop order is triggered. However, in cases where the stock is dropping rapidly, the stock is halted and reopens for trading, or when the stock gaps down in the morning (lower than the prior day's closing price), your execution price could be significantly lower than your stop price. Keep in mind, too, that such sales could trigger taxes and keep you from participating in future rallies.

If your wealth management goals include donating to charity or transferring wealth to the next generation, using highly appreciated stock to do so could reduce your concentration risk and offer potential tax advantages.

Donating highly appreciated stock to charity generally makes more sense than selling the position and donating the proceeds, because you can avoid paying capital gains tax and potentially receive a tax deduction equal to the fair market value of the donated shares. You can gift stock directly to a charity or use charitable strategies, such as a donor-advised fund or a charitable remainder trust.

Or you might consider gifting the appreciated stock to a family member—maybe that new graduate—particularly if they are in a lower tax bracket than you. Not only will you avoid capital gains tax, but you could also remove the future potential appreciation from your estate. You can gift up to $18,000 per recipient in 2024 ($36,000 for a married couple) without eating into your lifetime gift and estate tax exemption. Or you could use a portion of your $13.61 million gift and estate tax exemption to pass on the assets tax free.

Just be aware that the lifetime gift and estate tax exemption is set to be reduced by half at the end of 2025, so you may need to act soon.