Let me know if this sounds familiar. You’ve watched a position grow from a small bet into a significant chunk of your net worth. Now you’re not sure what to do.
You might leave a fortune on the table if you sell.
But you might lose everything you’ve built if you keep holding.
This is one of the most common scenarios I discuss with people. Stock that’s built up through RSUs, an early position in Bitcoin, or a bet made on a Mag 7 years back. This position now accounts for a significant portion of this person’s wealth and they’re not sure what to do next.
Here’s how I talk people through this situation.
Before thinking about any further upside scenarios, think about the downside.
What would happen if this position went to zero?
Are your financial goals dependent on this position not going to zero? If yes, that’s a sign your concentration risk is real, not theoretical.
Here are three scenarios when you should consider selling down some of your position. We’ll ignore tax implications for now in each of these to keep the examples simple.
You’ve Won the Game
If this position is worth so much that you could comfortably live off the proceeds for the rest of your life, you’ve already won the game. You don’t need to go for the highest score possible.
How much is enough to live off?
The 4% rule is imperfect but a reasonable starting benchmark.
Let’s say you have $10m in vested RSUs which make up the bulk of your net worth. Your current living expenses are $300k a year (3% of your assets).
Congratulations, you are financially independent.
You could sell out $7.5m of your vested RSUs and diversify it to lock your future in ($300k a year in spending needs divided by 4%). Then keep your other $2.5m invested if you still believe in the company’s future.
You take your winnings off the table while keeping your upside open.
Your Financial Plan Now Depends on This Position
Even if you haven’t reached the point where your assets can fully support your lifestyle, your position may have accelerated your timeline by decades.
Let’s say you’re 40 and you have $6m in a crypto asset thanks to your foresight to invest a decade ago.
You have another $1m in traditional retirement accounts. You put away an additional $200k a year from your job and your goal is to get to $8m total net worth before you retire from the corporate world.
If you diversify out of your crypto position today into a more conservative mix of assets returning 7% a year, you will reach your goal after ~1.5 more years of work.
Sure, your crypto position could catapult up in the next two months and help you reach your goal faster. But what if it goes to zero? Your timeline to retirement just extended by decades.
There is an asymmetric risk here in continuing to stay so heavily concentrated.
Your Life Directly Benefits From Selling
It’s important to think about the present value of your life, not just the future value of your assets.
The tradeoffs you’re evaluating are not always about pure financial optimization.
For example, you and your spouse might be expecting your first child together later this year and would like to move into your dream home to build lifetime family memories.
You’ve been steadily saving cash for a down payment but that still need another three years to get to the number. Meanwhile, you have your down payment sitting right there in vested options that you could exercise today and make your dream life a reality three years earlier.
Sure, those options could be worth hundreds of thousands more years from now if you keep holding until expiration.
But is that what you want? An extra two hundred thousand ten years from now when it won’t make much of a difference in exchange for three years of lost family memories while you’re in the prime of your life?
The right answer to a concentrated position isn’t always the one that maximizes expected value. Sometimes it’s the one that makes the life you actually want to live possible three years earlier.
I wrote about this in more detail in this piece.
What About Taxes?
The tax implications of selling a concentrated position are significant and worth their own deep dive. Especially for ISOs, RSUs, and crypto where the treatment differs meaningfully.
I’ll write more about minimizing taxes when selling out of a concentrated position in a future piece. Subscribe to follow along.
Or feel free to reach out if you’re working through your own situation. I love hearing from readers.
Nathan
Founder & Lead Advisor
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Kangpan & Co. is a fee-only, registered investment advisor specializing in helping mid-career professional navigate the work, life, and financial tradeoffs that define their 30s and 40s.
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