Concentrated Stock Diversification Calculator

Compare tax-efficient strategies for diversifying a concentrated stock position. This calculator models three approaches side by side: exchange funds, tax-aware long/short overlays, and selling to reinvest in index funds.

How the calculator works

This calculator simulates three diversification strategies, Exchange Funds, Tax-Aware Long/Short, and Sell to Reinvest, modeling taxes, growth, and risk year-by-year.

Exchange Fund

Swap your concentrated stock for diversified fund shares and defer taxes. You contribute your position to an exchange fund benchmarked to a particular index, providing immediate diversification upon entry. Under IRC Section 721, this is a tax-deferred exchange. Your original cost basis carries over into the fund. The fund holds a diversified portfolio (typically 80% public equities, 20% real estate). After the required 7-year holding period, you can withdraw by receiving a basket of diversified stocks in-kind (no sale required).

Tax-Aware Long/Short Overlay

Keep your stock and add a long/short overlay to generate tax losses for diversification. You maintain your concentrated position and overlay it with a long-short portfolio. The overlay buys diversified stocks on margin and shorts other stocks. The overlay trades frequently, selling losing positions and buying highly correlated (but not substantially identical) replacements to generate tax losses without materially changing your market exposure. Each year, as you sell some concentrated stock to diversify, the harvested losses offset the taxable gains.

Sell and Reinvest

Sell your concentrated position, pay capital gains tax upfront, and reinvest the after-tax proceeds into a diversified index fund. Your cost basis resets to the after-tax amount you reinvested, so future gains are calculated from this new, higher baseline.

Market and Risk Modeling

Individual stocks are typically 2-3x more volatile than diversified indices due to company-specific risks. The calculator models four market environments: calm, rising, falling, and volatile, each with different volatility, return, and loss-harvesting assumptions. Falling and volatile markets mean-revert toward baseline conditions over long horizons.