Personal Finance

I'm in my early 50s with a net worth of $8m and 65% of my money is in one single stock - should I diversify?

John Seetoo

Published: January 14, 2025 9:55 am

24/7 Wall Street Key Points

• People with portfolios containing a grand slam-winning stock that keeps on going up are understandably reluctant to sell while the trend is continuing.
• There are ways for one to gradually diversify and mitigate capital gains taxes when selling those stocks.
• Financial planning strategies and tools are not solely for families, so unmarried single people who have built substantive net worths need to consider them years before retirement.
• Take this quiz to see if you’re on track to retire (Sponsored)

Legendary Fidelity Magellan fund manager Peter Lynch attributed his success to finding stocks that he dubbed “Multi-Baggers” and “Ten-Baggers”. These are stocks that return 100% to 1,000% or more profit. In our current market, stocks like Nvidia would fit that category for many portfolios. When one gets such a runaway hit stock, it often becomes anathema to sell it, even at the expense of elevated lack of diversification risk. When the portfolio owner is single and doesn’t have the responsibility of a spouse and children, the temptation to risk higher returns vs. a meltdown becomes even stronger. 

Riding a Winning Horse

A single, recently retired 50-ish Reddit poster in this exact circumstance was seeking advice about whether or not to diversify from a stock that comprises $5.2 million of his $8 million liquid net worth (65%).  He has been managing his finances on his own and confesses to a lack of discipline and the gaps in his strategy, despite his success to date. His other details are as follows:

• $8 million portfolio, 95% in stock. $5.2 million in a single stock (ticker undisclosed), with the remaining $2.5 million in VOO, QQQ, and other ETFs, plus some individual stocks.
• $300,000 cash.
• $10,000/month expenses, including mortgage, transportation, utilities, etc.
• Owns a $1.2 million home separate from liquid net worth quote with $ 1 million home equity and $200,000 mortgage remaining.
• Travels several times per year with roughly $5,000 expenses per trip.
• Has expressed an interest in diversification and possibly in dividend stocks, but is concerned about capital gains taxes on the single, large $5.2 million stock position.

Concentration Risks

Respondents posted a number of advice suggestions and identified both acknowledged and possibly overlooked risks to the poster’s portfolio that could upset his early retirement.

• The obvious risk of the single large stock position ran the potential risk of going the way of former household names like Enron, Sears, and Nortel. While undisclosed, the stock’s large percentage of the overall portfolio could be a major threat if the company were to suffer a halt in trading, a major scandal, or other catastrophe.
• A 95% concentration in stocks was also cited as a risk. Some suggested perhaps an 80/20 stock/bonds ratio. 
• There was no mention as to whether or not any of the funds were in tax-deferred IRA,  401-K, or HSA accounts. 
• SIPC insurance is limited to $500,000 per account, so there were risks to any funds in a singular account above that sum.
• As he acknowledged some gaps in his financial management knowledge, a consultation with both an estate attorney and a financial planner was advised.

Spreading the Eggs From the Basket

The poster’s relatively conservative ($135,000) annual spending habits (under 2.0% of net worth) earned props from respondents that qualified him for FatF.I.R.E. retirement status, which is based on an average 4.0% of net worth annual lifestyle spending. However, dividing the risky single basket and holding all of the eggs was certainly the most evident priority. Luckily, there were several ways that could be conducted to address the poster’s concerns.

• Transferring shares of the appreciated stock into Roth IRA($8,000 cap) or Roth 401-K ($31,000 cap) accounts immediately resets their cost basis to market price as of the transfer date. Selling those shares would make capital gains taxes negligible.
• Deploying an out-of-the money covered call strategy can earn the portfolio extra income, and if the stock makes another run, underlying shares can be called away at the top of the market, so liquidation is on autopilot. Concurrently, GTC stop sell orders at prices that the poster feels lock in profits can also be entered to prevent holding onto losses.
• Dividend stocks to start looking at and consider should include high-yielding REIT, midstream energy, and BDC stocks, which are normally not included as part of the S&P or comparable indexes, due to their 90% shareholder profit remittals for tax purposes. Yields of 7% to double digits are not uncommon. 
• Diversification into precious metals, international securities, and other asset classes are also worth consideration. 
• If the poster finds he has too much time in his hands, creating a side hustle or hobby into a registered business entity can allow for deducting the cost of expenditures normally taken otherwise, and can even allow for applying losses against other passive income. As long as the entity records a profit in 2 out of 5 years, the IRS will allow its status to continue. 

This article is intended to be solely read as informative, Further comprehensive information should be sought from a financial professional.