The Best Way to Sell a Concentrated Position

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Imagine being the typical SpaceX employee over the last few months. Your shares IPO at $135 and within a few days they peak at $225/share (up 67%) before they begin to decline. As of this morning they sit at around $139, or about 3% above the IPO price. Given this, what percentage of your shares would you sell once your lock-up ends?

This question isn’t just relevant to SpaceX employees, but to anyone who’s ever held a concentrated position in an individual stock. After all, do you hold on in hopes of future growth? Or do you get out in case things get worse?

The research related to IPOs is crystal clear—IPO shares are likely to underperform the rest of the market (after adjusting for firm size). Jay R. Ritter looked at over 9,200 IPOs from 1980-2024 and found that, during their first year, IPO firms underperformed similar-sized public companies ("size-matched firms") by 5.8%.

Table 20-1 (from his IPO findings) highlights how most of this underperformance occurs in the 6 months following the end of the share lock-up (or the "Second six months" after the IPO):

You can see a similar story when you compare SpaceX’s returns (up through July 22, 2026) to the average performance of the top 10 IPOs (by size) since 1999 (chart from Exhibit A):

This underperformance relative to the market isn’t just true for IPOs either. In his paper Underperformance of Concentrated Stock Positions, Antti Petajisto, from Brooklyn Investment Group, found the same thing was true for individual stocks. As he concluded:

Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year.

This means that if you picked a stock at random, we would expect it to underperform the overall market by about 0.82% per year. Note that the aggregate return of all stocks must equal the market’s return, so the average underperformance should be 0% per year. But this is only true because a small number of huge winners bring up the average. As Hendrik Bessembinder stated in his paper Do Stocks Outperform Treasury Bills? (emphasis mine):

When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926 , as other stocks collectively matched Treasury bills.

With this context, how should one go about exiting a concentrated position? What options are out there? Let’s dig in.

How to Exit a Concentrated Position

When it comes to exiting a concentrated stock position, below are some options at your disposal.

Sell Everything (Wealth Maximization)

Based on the research above, the wealth-maximizing strategy is to sell all of your concentrated position immediately. Statistically, selling everything and moving it all into a broad market index fund would outperform holding on the vast majority of the time.

While this strategy maximizes your median wealth (or the middle outcome across all the ways the future could unfold), many still won’t choose it. Why? Because of two things—taxes and regret. Let’s look at each now.

Sell a Chunk, Then Tranches (Tax Optimal)

While selling everything now is the simplest and lowest-risk approach, technically you could end up with more wealth if you optimize for your taxes. For example, imagine you have a single stock position with a $1M capital gain. If you sold it all now, you’d have to pay taxes on the full $1M. But there’s a better way! You could sell a large chunk now ($700k) and then sell the rest in tranches ($100k) over the next few years to reduce your total tax burden.

Of course, the devil is in the details. How you decide to do this will depend on the size of your position and your tax situation (e.g., married/single, high income/low income, etc.). While this approach is riskier than selling everything immediately, it’s possible to generate more total wealth with proper tax planning.

Sell Based on Tax Losses (Tax Deferral)

Another tax-friendly approach to exiting a concentrated position is to only sell based on tax losses that you generate. Direct indexing providers have the ability to generate losses in your portfolio that can be used to offset the gains in large, concentrated positions. This will allow you to sell down your concentrated positions (in a tax-deferred way) while diversifying your portfolio.

This approach won’t work for all investors in all market environments. Once again, the devil is in the details. Nevertheless, it’s something you should consider if you want to exit a large single stock position while minimizing your taxes.

Sell Half (Naive Regret Minimization)

Putting taxes aside, sometimes the best approach for getting out of a concentrated position is the simplest—sell half. This comes from what Harry Markowitz, the father of modern portfolio theory, told Jason Zweig in an interview:

I visualized my grief if the stock market went way up and I...