The densest stars in the universe are also the most magnificent. They burn with an intensity that outshines everything around them. They’re also the most short-lived, and they die the most violently. The very quality that makes such a star brilliant, the ferocity with which it burns through its own fuel, is the same quality that guarantees a sudden and spectacular collapse. Brightness and fragility aren’t opposites here; they are the same trait seen from two perspectives.
Building significant wealth often follows a similar dynamic.
Almost every large fortune is built through concentration. A founder may pour a career and her net worth into a single company, or perhaps a family holds one commercial property through three decades of appreciation. An executive might accumulate equity in the firm they helped build. And too often we’ve seen a family business become the household's income, its identity, and nearly all its balance sheet. Concentration, when it works, is not a mistake. It’s very often the source of brilliance in the first place.
The difficulty is that the same intensity that creates the fortune is what leaves it exposed. The strategy that builds wealth and the strategy that protects it aren’t one and the same.
The Position That Built the Wealth Is the One That Threatens It
Ironically and paradoxically, the very asset that created the wealth is usually the single greatest threat to keeping it. Concentration can be a superb wealth-creation strategy. It rewards conviction, focus, and the willingness to put everything behind one idea. It’s also a poor wealth-preservation strategy, for exactly the same reasons. Once the fortune exists, the objectives quite often tend to change. The question is no longer how to make the number grow larger, it’s how to make sure the number, and the life it now supports, survive over many generations.
Most people are slow to notice that the objectives have changed, because the position that needs diversifying is precisely the one they feel most loyal to and most confident about.
What the Base Rates Actually Say
The case for humility about any single position rests on some sobering data. J.P. Morgan's long-running study of concentrated stock positions, drawing on the Russell 3000 since 1980, found that roughly 40% of all stocks suffered a permanent decline of 70% or more from their peak, a loss from which they never meaningfully recovered. Two-thirds of all stocks underperformed the index itself, and the return on the median stock over its lifetime, compared with simply owning the index, was negative.¹
The pattern holds across a far longer horizon. Hendrik Bessembinder's research found that, of all the common stocks in the U.S. market since 1926, more than half delivered lifetime returns that failed to beat one-month Treasury bills (also known as the risk-free rate). The entire net wealth creation of the market traced back to just the best-performing 4% of companies.²
The uncomfortable implication is that owning a concentrated position, statistically, is a bet against the odds. The market's returns are real, but they are produced by a small number of exceptional winners scattered inside a large field of disappointments. Diversification is simply the decision to own the field rather than to guess the winner. The trouble is that the person holding a concentrated position already believes, understandably, that they’re holding one of the winners, especially in-light of its historical success.
Concentration Wears Many Costumes
Concentration is easiest to see in a single public stock, but it’s rarely confined to one. It appears in a portfolio anchored to a single industry, where every holding rises and falls on the same handful of macroeconomic forces. It appears in a family whose wealth sits almost entirely in one commercial or development property, exposed to a single tenant, a single city, and a single interest-rate cycle. And it appears, most acutely of all, in the family business.
The family business is the most concentrated position of them all, because it bundles several exposures into one. The same asset provides the family's income, its largest store of capital, the careers of the people who run it, and a great deal of the family's identity. When one asset is simultaneously the paycheque, the pension, the profession, and the name over the door, a single adverse event does not touch one part of the balance sheet. It touches virtually everything all at once.
Why We Hold On
If the case for diversifying is so clear, the resistance to it deserves scrutiny. Resistance is rooted in real psychology rather than simple stubbornness. Behavioural researchers have documented the endowment effect, our tendency to value something more highly simply because we already own it, alongside a powerful bias toward the status quo.³ We do not weigh a concentrated holding the way a newcomer would, we weigh it as ours.
Familiarity compounds the effect. We mistake what we know well for what’s safe, which is why employees so reliably overload their retirement savings with their own company's stock, concentrating their financial future in the very same place they’ve already concentrated their career.⁴ The position feels safe precisely because it’s familiar, but familiarity and safety are not the same thing. The stock doesn’t know you own it, and the property doesn’t care how long it’s been in the family.
There is loyalty too, and pride, and the memory of what the position has already done for you. All of it is human and none of it is foolish, as these feelings are valid, but none of it changes the statistical base rates.
The Tax Tail and the Dog
The most frequent and sometimes reasonable objection to diversifying isn’t psychological, it’s practical. Selling a highly appreciated position triggers tax, and in the case of a private company or a family business, it may also mean surrendering control. These are real costs, and they’re the reason concentration so often persists long after it should.
But there’s a difference between respecting the tax cost and being governed by it. When the fear of a tax bill becomes the sole reason for holding a position that could fall 70% and never recover, the tax tail has almost certainly begun to wag the investment dog, and risk management has taken a backseat. A large tax bill is a defined, survivable, and voluntary cost. A permanent capital loss is none of those things. The goal isn’t to ignore tax; it is to stop letting it be the only voice in the room and to appreciate the real trade-off between tax minimization and downside risk.
Diversifying Without Destroying Value or Control
The good news is that diversification is rarely an all-or-nothing decision, and it doesn’t have to be a single, tax-detonating sale. Done well, it is a designed process rather than an event. Markowitz's foundational insight, that diversification is the closest thing investing offers to a free lunch because it can reduce risk without a matching sacrifice in expected return, is precisely what makes the effort worthwhile.⁵
For a concentrated public position, the toolkit is broad. Gains can be realized in stages across several tax years to smooth the liability rather than absorb it all at once. Highly appreciated securities can be donated in kind to a foundation or donor-advised fund, which in Canada can eliminate the tax on the accrued gain entirely while funding a family's philanthropy. The position, if that of a listed public equity, could be hedged, using collars or similar structures, to reduce downside risk without an immediate sale. Borrowing modestly against the position can fund diversification elsewhere while deferring a realization. None of these is a silver bullet, but in combination they turn a blunt decision into a gradual one.
For a private company or a family business, the work is more delicate but the principle is the same. A staged sale to management or to a strategic partner, an estate freeze that caps the founder's exposure while passing future growth to the next generation, the introduction of outside capital, or a phased succession can all reduce concentration while preserving both value and control. These aren’t off-the-shelf products. They are bespoke structures that require the founder, their tax counsel, their legal advisors, and their wealth advisors to work from the same plan.
Why It Is Time-Sensitive
The final and most overlooked feature of concentration risk is that the window to address it doesn’t stay open. Diversification is easiest to execute from a position of strength, when the business is thriving, the stock is near its highs, the property is fully tenanted, and there is no pressure to act. It’s hardest, and most expensive, when it has become urgent, because a business is faltering, a sector is repricing, or a health event or a death has forced a sale on someone else's timetable.
Selling from strength is a choice. Selling from weakness is a consequence. The best time to reduce a concentrated position is almost always the moment it feels least necessary, which is exactly why it’s so rarely done then. Waiting is not a neutral act; it is a decision to keep the bet on the table for another year.
So, What Should You Do?
At Westmount Wealth Management, this is where we spend our time. When a client's wealth is concentrated in a single company, a single sector, a single property, or the family business, we do not treat diversification as a one-time transaction to be pushed through. We treat it as a multi-year plan, designed around the client's tax position, their need for control, and their timeline, and coordinated with their accountant and legal advisors so that the advice is fully integrated.
We begin by quantifying the exposure, including the parts of it that are emotional rather than financial. Then we build a path that reduces the risk at a pace the client can live with, using the full set of tools available, so that the fortune is not held hostage to either a tax bill or a sentiment and a behavioural bias. The objective is simple to state and difficult to execute. Keep the wealth, and the life it supports, shining long after a single brilliant position would have burned itself out.
The brilliance that built the fortune deserves respect, but it doesn’t deserve to be the thing that ends it.
References
1. Cembalest, M. The Agony and the Ecstasy: The Risks and Rewards of a Concentrated Stock Position. J.P. Morgan, Eye on the Market, Special Edition.
2. Bessembinder, H. (2018). Do Stocks Outperform Treasury Bills? Journal of Financial Economics, 129(3), 440–457.
3. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives, 5(1), 193–206.
4. Benartzi, S. (2001). Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock. The Journal of Finance, 56(5), 1747–1764.
5. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
This information has been prepared by Damir Alnsour, MBA, CFA, CFP®, TEP, FCSI® who is Head of Portfolio Management, Portfolio Manager, Financial Planner for Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
