When people reach 7-figure portfolios, many of them start to think about wealth preservation and diversification. That’s what one Redditor thinks, but this individual isn’t as diverse as they would like.

In a recent Reddit post, this individual mentions that they have a high 7-figure position in their employer’s stock. We don’t know the employer, but between vesting options, a high salary, and long-term appreciation, it’s easy to see how the position can grow over time.

While it’s produced life-changing returns for the Redditor, the individual is nervous about having practically all of their eggs in one basket. Should he sell off some of his positions to diversify, even though it will result in a high tax bill? These are my thoughts, but it’s always good to seek a financial advisor if you can.

Diversifying into Other Investments

Ideally, the Redditor can sell some of their shares and put the excess cash into another investment, like ETFs. However, some of those choices are not available. The Redditor mentioned that their employer doesn’t allow them to buy ETFs during the contract. 

However, you might be able to purchase ETFs that do not invest in the employer’s stock. Rental properties may also be feasible investment opportunities, depending on the employer. 

If you can’t access most investments, you can try the alternative assets route or put your money into a high-yield savings account. It’s important to know what you will do for the money to help it grow.

Maybe You Don’t Have to Sell

Having all of your net worth tied to a single stock is certainly risky. Usually, it makes sense to trim some of the position and spread it across other investments. However, the limited choices may mean that holding onto the company’s shares can boost long-term returns.

Granted, it heavily depends on the company, its finances, and how you feel about its future. For instance, Alphabet(NASDAQ:GOOG) isn’t going out of business anytime soon. It has consistently outperformed the stock market, has growth opportunities, and trades at a reasonable 26 P/E ratio. It may make sense to hold onto Alphabet shares for a little longer.

An employee may feel differently about a stock like Robinhood (NASDAQ:HOOD). This stock has more than tripled in 2024, but it has underperformed the stock market since its IPO in 2021.

It wasn’t long ago when Robinhood traded below $10 per share, and a cooldown in the crypto market can change the stock’s recent fortunes. While people with small positions in Robinhood may have no issue with these risks, it’s different if Robinhood is the only stock in your multi-million dollar portfolio.

It’s Okay to Pay Capital Gains Taxes

An employee who feels good about the company’s finances and long-term growth opportunities may want to hold their shares and wait for a better time to sell. However, if the stock recently enjoyed a rally and the investor doesn’t feel as confident, selling some shares may be beneficial. Even if the company is solid, selling a bunch of shares can reduce your financial stress, since all of your eggs are no longer in one basket.

One of the main fears of selling stocks is having to deal with capital gains taxes. Those taxes aren’t as bad for the Redditor, since they have long-term capital gains. While no one likes paying extra taxes, that additional cost offers more financial flexibility. You can put the cash into other assets instead of putting all of your wealth into a single stock.

Selling a stock while the gains are good is important for another reason. When most people talk about their regrets in the stock market, they wish they had bought a certain stock five years ago.

However, other investors bought the right stock and saw its value skyrocket but held onto it for too long. Supermicro (NASDAQ:SMCI) may be that stock for some people, given that it has quadrupled from January to March and is now down by more than 70% from its all-time high. People who bought at $50/share initially did very well, but if they still have shares today, they probably aren’t feeling as good about the investment. 

Paying capital gains taxes is the only way to realize a gain from your investments. Sometimes, realizing a gain is better than watching it whittle away.

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