Do you hold too much in one investment?

For one reason or another, investors can sometimes find themselves holding a large position in a single investment.

Perhaps you receive an employer's stock as part of your compensation. Perhaps you inherited a large position. Or perhaps you made an early investment in a company that turned out to be very successful.

Whatever the reason, it may be worth reexamining any single position that accounts for 10% or more of your investments. Holding that much might be appropriate in a few unique situations. But for most investors, that level of concentration might be too risky for your goals.

Here’s more on understanding whether a large investment is appropriate for your situation and what to do about it if you decide to diversify.

When might a large investment be appropriate?

A large investment might be appropriate if it is a diversified mutual fund or ETF. Some funds and ETFs hold hundreds of stocks, from a wide variety of types of companies. Holding a lot in a low-risk investment like a money-market fund or CD might be appropriate if that money is earmarked for a specific goal. For example, perhaps that money represents your emergency savings, or perhaps you know you’re going to need that money soon and you want to keep it safe.

However, you might be taking on too much risk if you hold so much in a higher-risk or less-diversified type of investment. Holding 10% of your total portfolio in a single stock could be too risky. So might be holding that much in a narrow mutual fund or ETF, such as a fund or ETF that invests only in a specific industry or that uses an aggressive strategy.

Why could it be risky?

Holding anything in stocks subjects you to a certain amount of market risk, meaning the risk that the whole market goes up or down. But with an individual stock you’re subject to the additional risks of any company-specific issues that occur. These risks could include dramatic problems like scandals but also more mundane ones, like a company losing its competitive edge. Choosing a stock that appears to have a bright future might help reduce this risk. But the fact is that no one—not even that company’s CEO—knows for sure how the stock will perform in the future.

Similar risks apply to other types of narrow or higher-octane investments. Investing heavily in one industry or in cryptocurrency funds might turn out well, but it could also turn out very poorly. The more concentrated you are, the more exposed you might be to the risk of an extremely large loss.

Benefits of diversifying

Diversifying means spreading your investments around broadly, such as by holding the stocks of many different types of companies and many different individual companies.

The aim is not necessarily to increase your level of return. Instead, diversifying may help reduce how much risk you take on for a level of potential return. If you’re well diversified, then any problem that affects a specific company, or even an entire industry, may have a more limited impact on your portfolio—because no single investment accounts for a disproportionate part of your money.

Diversification does not guarantee that you’ll earn a profit or protect you from ever losing money. If the whole market goes down, your portfolio may go down too. (Further diversifying across different asset types or classes, like holding some bonds in addition to stocks, may help provide some cushion in such times.) But diversification can help smooth out the bumps in your portfolio’s performance over time and protect you from being overexposed to any one type of risk.

How to diversify: Selling or reducing your concentrated position

If you hold a lot in one investment, then diversifying essentially means selling some or all of that position and investing the proceeds in a more diversified alternative.

Of course, that might be easier said than done if selling would trigger a big tax bill or if you feel an emotional attachment to that investment. Here are some of the different ways you could handle the decision to sell. Remember also to consider this position in the context of your full portfolio, not only in the context of the account it sits in.

Sell all at once

If you hold a concentrated position in a tax-advantaged account, like an IRA, then you could sell all at once without worrying about triggering a tax bill. You also don’t have to stress about a tax bill if the investment has lost money since you bought it, even if you hold it in a taxable account. In fact, if a stock you own in a taxable account has lost money since purchase you may be able to use the loss to offset taxes on other gains or a certain amount of income.

Pros: Simple and easy.

Cons: May generate a tax bill if you’re selling at a gain in a taxable account.

Staged selling

One alternative is to space your sales out, like gradually reducing your position over the next several years. This will still create tax consequences if you’re selling at a gain in a taxable account. But if your position is very large, then this approach could help you spread those gains over multiple tax years so you avoid, say, getting kicked into a higher tax bracket one year due to a very large gain.

Pros: Less of a tax bite in any one year.

Cons: More complicated and takes longer. Leaves you exposed to the risk of concentration for longer.

Make a charitable donation

If your concentrated position consists of an individual stock that has risen significantly in price since purchase, then another option could be to donate a portion of the position directly to charity. Donating appreciated stock may come with unique tax benefits for donors, and potentially allow for a greater benefit for the receiving charity.

Pros: Potential tax benefits.

Cons: Not applicable for investors who wish to hold on to the full value of their investment.

Get professional help

This might be a good option if diversifying that position feels too logistically or emotionally overwhelming to handle on your own. Analysis paralysis is real. By looking at your full portfolio, a professional might even be able to come up with more sophisticated strategies that could work in your unique situation—like offsetting gains with losses to reduce your tax bill, or even hedging your position in the short term. (If you’re looking for help, learn more about how we can work together.)

Pros: Helps you avoid getting stuck. May have a better solution for your specific situation.

Cons: Some people prefer to go it alone. Different forms of advice may come with costs.

How to diversify: Reinvesting the proceeds

Once you’ve sold or reduced that position it’s important to reinvest the proceeds according to your goals and timeframe, so your money can keep potentially growing.

There are many ways to go about choosing a more diversified mix. This simple walkthroughLog In Required can help you narrow your choices with just a few clicks.

How to stay diversified

Keeping your investments on track isn’t a one-and-done exercise.

You’ll want to check in on your portfolio’s diversification from time to time to make sure you haven’t become overconcentrated again. This is particularly true if you like to invest in individual stocks, in which case your top performers might grow too large over time, or if you regularly receive a company’s shares, like through a stock-compensation plan at work.

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Fidelity customers can review their positionsLog In Required  or analyze their portfolio’s positioningLog In Required . Or, you can explore ways to build a diversified portfolioLog In Required , or learn how we can work together.