Too many tech employees tie their financial life to a single stock—their employer. I’ve seen paychecks, bonuses, and wealth stack up in one name. That feels great in a bull market. It can erase years of progress in a downturn. The goal here is simple: show a clean way to cut that risk immediately, move a large chunk into a broad index, and do it without paying taxes today.
The Hidden Risk Sitting In Your Portfolio
For many in tech, one company dominates both income and net worth. I often see 40% of annual pay and 80% of total wealth linked to one stock. That is concentration risk. If the stock stumbles or the company faces trouble, your job, cash flow, and portfolio all drop together.
We do not have to look far for cautionary tales. Enron collapsed quickly. GoPro and WeWork soared, then crashed. Their former employees learned a hard lesson. A single name can move faster than you expect and in the wrong direction. The market does not care how long you worked there or how loyal you feel.
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Why Smart People Stay Stuck
Most people freeze because of taxes. Selling appreciated shares triggers capital gains. You know it. It hurts to hand over part of a hard-earned gain. The result is no action for years, even as the risk grows.
“You can reduce a large chunk of that exposure on day one and owe $0 in taxes today. Then you can move that money into a broad index and sleep better at night.” — Taylor Sohns, CEO of LifeGoal Wealth Advisors, CIMA, CFP
There is a way to shrink the position right now without creating a tax bill today. The key is using a tool designed for concentrated stockholders.
The Strategy: Exchange Funds
An exchange fund pools shares from many investors who each contribute different single-stock positions. In return, each investor receives a diversified basket of stocks through the fund—without selling their original shares. Because you are contributing stock rather than selling it, there is no capital gains tax due at the time of contribution.
Here’s what makes it useful: a large portion of your single-stock risk can be diversified on day one. You move from one name to a diversified basket while deferring taxes. Then you can align that diversified exposure with a broad market index.
How Exchange Funds Typically Work
An exchange fund is usually organized as a partnership. You contribute your concentrated shares, and the fund combines them with those of other investors. In return, you receive units in the fund that represent a diversified mix.
- Immediate diversification of a large portion of your exposure.
- No tax triggered at contribution, because you are not selling.
- Tax is deferred until you later redeem and sell distributed shares.
- Many funds target broad, index-like exposure.
Most funds have rules. Common features include a lock-up period, investor eligibility standards, and minimum contribution sizes. Fees vary. Some funds use leverage. It is important to understand each fund’s structure before moving forward.
Benefits You Can See Right Away
The biggest win is breaking the direct link between your job and your portfolio. If your employer hits a rough patch, your reduced exposure in the stock means your portfolio can hold up better. You also regain control of risk. A diversified basket spreads your exposure across sectors and companies. That reduces the odds of a single event wiping out years of savings.
There is also a behavioral benefit. Once the concentrated risk is cut, it becomes easier to stick to a plan. You can pick a broad index and add to it over time. That creates discipline around saving and investing rather than guessing on a single ticker.
What To Watch For
While exchange funds solve a tax and risk problem, they come with trade-offs. You should weigh them with care. The most common trade-offs include lock-up periods and liquidity limits. Many funds require you to stay invested for several years. There can be fees at the fund level as well. Fund holdings can carry tracking error versus a broad index. There may be rules about the types of stocks they accept.
Another point to consider is tax basis. The cost basis of the shares you contributed carries over. When you later receive distributed stock and sell it, the gains are taxed then. The point is not tax elimination. It is tax timing and risk control. You are choosing to reduce concentrated risk now and handle taxes later in a more controlled way.
How This Compares With Other Paths
Exchange funds are not the only way to reduce concentration risk. They are a strong option when you want day-one diversification with no immediate tax bill. I also use other tools based on an investor’s goals, time frame, and company rules.
- 10b5-1 plans: A preset schedule sells shares over time. This reduces emotion and insider trading concerns, but it triggers taxes as you sell.
- Tax-loss harvesting and direct indexing: You can offset gains with losses from other holdings. This can reduce, or even eliminate, the sales tax.
- Charitable giving or donor-advised funds: Donate appreciated shares, avoid capital gains, and get a deduction if you itemize. Great for the philanthropic.
- Collars and prepaid variable forwards: Options-based hedges and monetization can limit downside and defer taxes. These are complex and carry costs and risks.
- Employee stock purchase plans (ESPP) and RSUs: Selling on a set schedule can spread tax and market risk. Simpler, but taxes arise as you sell.
- Retirement plan strategies: In rare cases, special rules like net unrealized appreciation for company stock in a plan can help, but it depends on the plan and the numbers.
Each path has pros and cons. The right choice depends on your income, liquidity needs, tax bracket, company policies, trading windows, and risk tolerance.
Why A Broad Index Is The Next Step
Once you reduce the single-stock exposure, the next move is to anchor your portfolio in a low-cost, broad index. That can be the S&P 500 or a total market fund. The point is to spread risk across many sectors and thousands of companies. Costs stay low. Rebalancing is simple. You avoid guessing which stock will win next.
A core index also pairs well with a rules-based portfolio. You can define target weights for stocks, bonds, and cash. Then rebalance on a set schedule or when bands are breached. This adds structure. It keeps fear and greed from driving decisions.
A Simple Framework To Act
I see the same pattern over and over. The plan below helps move from stuck to steady.
- List your employer exposure across pay, RSUs, options, ESPP, and any side holdings.
- Set a target: what percentage of your portfolio should be in one stock? Most aim for under 10%.
- Choose your method: exchange funds for day-one diversification with tax deferral, a timed sale plan with tax-loss harvesting, or a mix.
- Build the core: select a broad index for the diversified sleeve.
- Automate: use 10b5-1 or calendar triggers for sales, and scheduled rebalancing.
Frequently Asked Questions About Exchange Funds
It helps to clear up some common points about how these funds work and who they fit best.
Who This Helps Most
Exchange funds can be a fit for employees with large, low-basis positions who want to cut risk now without selling. It can also help founders and early employees after a big run-up. If you hold restricted shares or are subject to trading windows, you need to review the rules. Not every share type is eligible. Many funds require you to be an accredited investor and meet minimums.
Risk and fees still matter. Diversified exposure does not mean risk-free returns. You still experience market ups and downs. The difference is that company-specific shocks matter less. For many, that is the key win.
What I’ve Seen Work In Practice
I’ve worked with employees who waited years because of the tax bite. They saw their company stock double, then fall 60%. The pain of that swing usually triggers action. But at that point, the options shrink. Acting early gives you more tools. The best outcomes I’ve seen follow a clear, staged process: cut the single-stock risk, align with a broad index, and automate future sales around vesting and windows.
One client used an exchange fund to diversify about half of their position at once. They moved that exposure to an index-like mix with no tax due that year. They kept selling the remaining shares over time using a 10b5-1 plan and a tax-loss harvesting program. The result was a smoother ride and far less anxiety every earnings season.
Practical Tips Before You Decide
- Inventory your actual exposure. Include vested and unvested equity, future vesting, and options.
- Check blackout dates and insider status. Make sure any move complies with company policy.
- Run the numbers on taxes now versus later. Compare scenarios over several years.
- Review exchange fund documents. Understand lock-ups, fees, and the target mix.
- Set a sell discipline for what remains. Automate where possible to remove emotion.
The right plan is the one you can stick to. Clear rules and simple building blocks help you stay on track during market swings and company news cycles.
I have one message for tech employees with a significant stake in a major employer. Do not let tax fear keep you frozen in a single stock. You can diversify a large portion of that risk now and keep your gains working in an index. That reduces the chance that one earnings miss or headline change will alter your life plans. As a CFP and CIMA, my job is to present you with options and trade-offs so you can act with confidence. Protect your future self from the risks you can see today.
