Managing Concentrated Gains and Portfolio Risk
Tax Efficiency and Diversification
Patient investors are rewarded with appreciation. That’s great, but it introduces complicated questions, with financial, practical, and emotional elements. Hold the embedded gains – or diversify and create a tax obligation?
Due to sustained positive U.S. equity market performance over the last three years, many investors have built up significant gains in taxable accounts. Additionally, more diversified indices like the S&P 500 have become a more concentrated and certain sectors (e.g., information technology) now occupy a larger percentage of the index.. A traditional U.S.-centric balanced portfolio of 60% stocks and 40% bonds at the start of 2023 is now approximately 70% equities and 30% bonds. While concentrated positions can magnify investment upside, they also create more drawdown risk.
Managing these gains deliberately, balancing tax efficiency, portfolio risk, and long-term goals, requires integrated wealth management, a blend of wealth planning and investment management. Potential taxes shouldn’t be viewed as a reason to stand still, rather something to manage proactively, as a component in a broader plan to reach defined goals.
In practice, we rely on two sets of tools when advising clients navigating embedded gains: tax-aware investment strategies and long-term planning solutions that incorporate charitable and estate considerations.
Tax-Aware Investment Strategies for Embedded Gains
One strategy to achieve desired diversification without taking any gains in taxable accounts is to diversify in tax advantaged accounts like 401ks, IRAs and SEP-IRAs within the same estate.
As for taxable accounts, rather than selling entire positions, portfolios can often be transitioned gradually, using lot-level accounting. By selectively selling higher-basis shares and spreading gains across multiple tax years, investors can move toward target allocations while reducing concentration or other portfolio risks. This active approach to investment management is particularly effective when coordinated with known liquidity needs or changes in income.
Tax-loss harvesting, especially in passive investment vehicles, is another important tool and has evolved into a year-round discipline rather than a year-end exercise. By realizing losses during periods of market volatility, investors can offset gains elsewhere in the portfolio without materially changing investment exposure. When implemented consistently and with careful attention to wash sale rules, tax-loss harvesting can meaningfully improve after-tax outcomes.
Deploying tax-managed separately managed accounts is also useful. Rather than owning a single pooled fund or a small number of individual stocks, investors hold many of the underlying individual securities of an index. This structure allows for loss harvesting at the individual security level over time, greater customization, and more precise management of embedded gains while maintaining index-like or customized exposure. Direct indexing is well suited for any taxable portfolios and for clients interested in excluding specific industries or securities. It can be especially effective in international equity portfolios, where lower correlation among holdings may create more frequent opportunities to harvest and “bank” losses. Importantly, losses and gains are applied across the entire taxable portfolio, making tax-loss harvesting valuable even when gains are realized elsewhere in an estate.
Also worth exploring are solutions that reduce risk without triggering immediate taxation, notably for investors with highly appreciated single stock positions. Exchange funds can provide diversification while deferring capital gains, though they come with meaningful drawbacks and limitations.
Other approaches, including options or derivative-based strategies, may offer partial liquidity or downside protection. These tools are used selectively due to their complexity and are generally reserved for concentrated positions with limited alternatives.
Planning Strategies and Long-Term Wealth Outcomes
Charitable planning remains one of the most effective ways to address long-term gains. Donating appreciated securities held for more than one year can allow investors to deduct the fair market value of the asset while avoiding capital gains tax on the appreciation. For charitably inclined clients, this often replaces cash giving and simultaneously reduces exposure to low-basis or concentrated holdings.
Donor-advised funds are frequently used alongside appreciated asset donations. They allow clients to take an immediate charitable deduction while retaining flexibility over the timing and recipients of grants. Donor-advised funds are commonly used to bunch charitable contributions into high-income years or to structure ongoing philanthropy following a liquidity event.
More complex estate planning tools may also play a role. Charitable remainder trusts, or CRTs, can be effective for clients seeking to combine diversification, income, and philanthropy. Appreciated assets can be contributed to the trust, sold without immediate taxation, and reinvested, while providing an income stream to the investor or beneficiaries.
A Long-Term Perspective
Managing long-term gains is rarely about eliminating taxes altogether. Instead, it is about aligning tax awareness with broader financial goals. Philanthropic intent, estate planning priorities, risk management, and liquidity needs factor into the right solution. In some cases, continued deferral of gains, including consideration of a potential step-up in basis at death, may remain part of the strategy, though it is best viewed as one tool among many.
At Evercore Wealth Management, we emphasize disciplined, integrated planning and investment management. By combining tax-aware investment strategies with thoughtful charitable and estate planning, our clients can manage significant long-term gains in a way that preserves flexibility, reduces after-tax drag, and supports long-term objectives across generations.
Jon Kropf is a Partner at Evercore Wealth Management and Head of the San Francisco office. He can be contacted at [email protected].
Age Matters
Concentrated holdings are arguably the greatest driver of wealth in the United States and the most risky form of investment. That’s a risk many entrepreneurs and executives, notably younger investors, are willing to take, at least for a while. Managing around these positions, to provide balance, oversight and, with time, proper diversification, is an important wealth management capability.
All assets receive a step-up in basis upon death. As a result, older investors must weigh the risks of not selling against the certainty of avoiding capital gain taxes. Also, many older investors have created trusts for heirs that avoid estate taxes but allow the donor to pay the income tax on trust earnings. This extremely efficient technique can also allow donors to replace appreciated assets within the trusts with cash and to have the appreciated assets receive a step-up in basis upon the donor’s death.
