Concentrated stock risk
Also: concentrated stock risk, single-stock risk, concentration risk, employer stock concentration
The risk that an outsized portion of a portfolio is invested in a single company's stock. For tech employees, this is typically employer stock from RSUs, ESPP, or exercised options.
Concentrated stock risk is the increased volatility and potential for permanent capital loss that comes from holding a large fraction of net worth in a single security. Academic research suggests that 10% of assets in one stock is a reasonable cap, and that holdings above 20% substantially increase the probability of large drawdowns. Employer stock is especially dangerous because income, bonuses, and the stock price often move together, concentrating both human capital and financial capital in the same company.
Example: a senior engineer has $1.8 million of vested RSUs and ESPP shares of her employer, representing 65% of her $2.8 million investable net worth. The stock falls 55% in a year on missed earnings guidance and layoffs. Her net worth drops to $1.8 million, her cash comp falls 20% as she loses her performance bonus, and her RSU refresh grant resets to a lower number of shares at a higher strike.
Common mistake: holding concentrated stock “just a little longer” to avoid capital gains tax. A 55% loss costs more than a 30% long-term capital gain.
Concentrated stock risk matters at every vest, at every tender offer, at IPO lockup expiration, and at 10b5-1 plan design.