Investing
All of your wealth in one stock—are you at risk?
The answer, especially when markets are volatile, may be: “Yes.” But there are some steps you might consider taking right away.
Few people set out to concentrate their wealth in a single company. Yet, over time—whether through career choice, investment selection or inheritance—many find themselves holding significant wealth in a single stock.
If you fall into this camp, you may be wondering if the inherent risks of maintaining the position outweigh the potential rewards—an especially complicated consideration for public company insiders who must comply with company and regulatory policies.
Assessing your position’s exposure to three key risk areas can help you decide if action is needed. The relevant solutions provided below can help bring you closer to your financial and personal goals.
1. The risk of losing money
As with any investment, what goes up can just as quickly go down. The risk to your personal balance sheet can be amplified if a single event or bad quarter significantly impacts the individual company whose stock you own. To regain control:
Determine how much of your portfolio to insulate from single-stock risk (Investors and insiders)
Analyze your full financial picture to determine how much diversification you need to accomplish your long-term financial objectives. You likely will fall into one of two camps:
- Protected—You could lose your entire concentrated position tomorrow and still achieve all your goals
- Vulnerable—You need to retain a portion of the concentration to reach your goals
Understanding how much of your concentrated position you eventually need to diversify will empower you.
Sell, but avoid moving the market with block trades (Insiders, proceed with caution)
Block sales enable you to sell a large number of shares in a single transaction at a negotiated price. This removes the risk of the stock price dropping as you try to sell, which can happen if you’re divesting a significant volume of shares.
If you are an insider: Be sure you have the blessing of your company’s general counsel and execute the sale in an open-window period.
Limit your exposure with collars (Not for insiders)
If you worry about the downside risk of your single-stock position but have faith in its potential, implementing a collar-like strategy may provide protection that’s also cost efficient: This structure limits your downside exposure to a predetermined amount (for example, to a stock price decline of 10%)—and limits your potential gains, offsetting the cost of this protection.
Some investors use a collar to secure a loan—with the position as the collateral—and invest the loan proceeds in a more diversified portfolio. They hold the portfolio until they want to trim their concentrated position.
While many executives are restricted from employing covered calls, collars or similar hedging strategies, they may turn to them after they retire to manage their single stock concentration.
Considering your options
2. The risk of taxes
By the time you decide to take some of your concentration off the table, your shares will likely have appreciated substantially, creating a significant tax liability if sold. Here are some ways to maximize the after-tax value of a single-stock position:
Prefund your philanthropic giving with a Donor Advised Fund (DAF) (Investors and insiders)
If you regularly give to charitable organizations: Consider contributing low-basis, long-term appreciated stock to a Donor Advised Fund in a particularly high-income year.
When the shares are sold within the DAF and the proceeds are reallocated to a diversified portfolio the benefit to you is threefold:
- You will not incur capital gains tax.
- You will be entitled to an immediate charitable deduction that will enable you to align the deduction to the year that most benefits you.
- You have the flexibility to decide when to distribute DAF funds to charities of your choice over time.
Note: All funds in a DAF must be contributed to charity.
Diversify your position and create an income stream with a Charitable Remainder Trust (CRT) (Investors and insiders)
Similar to a DAF, you will not incur capital gains taxes and may deduct the fair market value of the charitable component in the year of contribution. 1 Unlike a DAF, which entirely benefits charity, a CRT generates significant cash flow to you in the form of an annual income stream that is taxable to you upon receipt.
The remaining assets are distributed to charity when the CRT ends, whether at the end of a fixed term (up to 20 years) or upon the death of you or your spouse if created as a lifetime or survivor CRT.
Create a diversified portfolio without an immediate tax bill with an exchange fund (Not for insiders)
With this strategy, you contribute your single stock to an exchange fund and in return receive units of the fund. These units maintain your original cost basis.
Because each investor in the fund contributes shares of different companies, the units you receive represent a diversified basket of securities. The exchange is not deemed a taxable event, provided you wait seven years to redeem your units. During this period, you hold a diversified portfolio of assets and delay your tax bill.
3. The risk of negative public perception
As any current or former public company executive knows, the restrictions of being a company insider add another layer of risk to managing a single stock position. As an insider, all transactions in company stock are reportable and often scrutinized.
Therefore, it is imperative that you comply with all insider sale restrictions imposed by your company and strive to avoid surprising financial markets.
Here are ways to protect yourself from unwanted scrutiny:
Sell your company shares via a 10(b)5-1 plan (Insiders)
A 10(b)5-1 trading plan can protect you against accusations of trading on material nonpublic information (MNPI) and reassure public markets. This type of plan:
- Must be established during an open-window period when you are not in possession of MNPI
- Outlines which shares you would like to sell in the future at specified prices
- Goes into effect after a cooling-off period has taken place
Train the market to expect a sale (Insiders)
Financial markets like predictability. As a result, many insiders help the market know what to expect by either selling annually as soon as their equity awards vest, or through a 10(b)5-1 plan. Consistency is key and reduces the risk of signaling that there may be issues of concern within the company.
We can help
Concentrated stock positions are often responsible for significant wealth creation. They also can be the cause of meaningful wealth destruction.
What role can your concentrated position play in fulfilling goals you have for yourself, your family and your community? Your answer will help guide you toward taking advantage of opportunities and navigating the risks unique to concentrated positions.
This article is the third in a three-part series that looks at concentrated positions—and the unique opportunities they afford—with a goals-based perspective. (Read the first two articles: Worried you may own too much of one stock? and Make the most of your company stock, today and tomorrow)
Your J.P. Morgan team is ready to assist you in (re)evaluating your single-stock position and how various strategies can move you closer to your goals.
1The charitable component of the CRT is the value of the charitable remainder interest which is calculated as the value of the donated property less the present value of the annual income stream that you will receive.
IMPORTANT INFORMATION
Investment trends may not materialize. Sustainable Investing and investment return are not always aligned, and may lose value.
This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS
Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.
NON-RELIANCE
Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request.
J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP. Authorized and regulated by Commission de Surveillance du Secteur Financier and jointly supervised by the European Central Bank and the CSSF. Deemed authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the United Kingdom for a limited period while seeking full authorization, are available on the Financial Conduct Authority’s website. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cordusio 3, 20123 Milano, Italy, and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In the Netherlands, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch, with registered office at World Trade Centre, Tower B, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands. J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF in Luxembourg; J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is also authorized and supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan Bank Luxembourg S.A. under registration number 71651845. In Denmark, this material is distributed by J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. with registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is also subject to the supervision of Finanstilsynet (Danish FSA) and registered with Finanstilsynet as a branch of J.P. Morgan Bank Luxembourg S.A. under code 29009. In Sweden, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial is also subject to the supervision of Finansinspektionen (Swedish FSA). Registered with Finansinspektionen as a branch of J.P. Morgan Bank Luxembourg S.A. In France, this material is distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) S.A., which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A. is a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission—CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as
J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
- May contain references to dollar amounts which are not Australian dollars;
- May contain financial information which is not prepared in accordance with Australian law or practices;
- May not address risks associated with investment in foreign currency denominated investments; and
- Does not address Australian tax issues.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide.
© 2022 JPMorgan Chase & Co. All rights reserved.
