For executives and founders who have gotten rich off one stock, sometimes it is possible to have too much of a good thing.
While the tech stock boom has meant a windfall for employees at high-flying companies, it’s risky to have too much of your net worth tied up in one stock. Some advisors ascribe to a 10% rule of thumb — meaning no one stock or asset should make up more than 10% of a portfolio.
“It represents both the biggest risk and biggest opportunity for that client,” said Rob Romano, head of capital markets investor solutions at Merrill.
Founders and long-time employees who want to diversify their portfolios can face steep capital gains taxes when they sell long-held stock in order to reinvest. Instead, they can contribute their shares to an exchange fund (not to be confused with ETFs).
Exchange funds, also known as swap funds, pool shares from multiple investors, who receive a partnership interest or share of the fund. After a designated lock-up period — usually seven years — investors can redeem their shares for a diversified basket of stocks equal to their interest in the fund.
