Individuals with significant wealth concentrated in a single stock, such as executives and founders from high-growth tech companies, face a notable risk related to their net worth. Financial advisors often suggest a guideline that no single asset should constitute more than 10% of a portfolio, due to both the associated risk and potential opportunity.
To address portfolio diversification and mitigate the impact of capital gains taxes on long-held stock sales, individuals can contribute shares to exchange funds, also known as swap funds. These funds pool shares from multiple investors, who then receive a partnership interest in the fund. After a specified lock-up period, typically seven years, investors can redeem their interest for a diversified basket of stocks equivalent to their fund share.
Exchange funds have seen increased popularity, particularly with strong stock market returns driven by sectors such as artificial intelligence. Many publicly traded tech companies are reportedly increasing equity compensation, contributing to the relevance of such diversification strategies.
Generally, exchange funds allocate approximately 80% of their assets to stocks, often aiming to track benchmark indexes like the S&P 500 or Russell 3000. The Internal Revenue Service mandates that the remaining 20% of assets be held in non-security forms, with real estate being a common choice.