A Savvy Approach to Protecting Wealth and Embracing Growth

Introduction

P&G employees and retirees often accumulate significant holdings in company stock, whether through long-term employment, stock purchase plans, or equity compensation. While this reflects confidence in a trusted global leader, it also exposes investors to the risks of over-concentration. Managing such positions requires strategies that address growth, tax efficiency, and risk management without sacrificing loyalty to the brand.^{1 2}

At Savvy, we focus on empowering P&G employees and retirees with sophisticated tools to transition from concentrated stock positions to diversified portfolios. This whitepaper, part of our Bounty of Wealth: Absorbing Financial Insights for P&G series, explores three key strategies: exchange funds, standard direct indexing, and direct indexing with long-short overlays. These approaches can help transform a concentrated portfolio into a resilient one tailored to your financial goals.

The Challenge of Concentrated Stock Positions

Holding a significant portion of wealth in a single stock, even a strong performer like P&G, comes with risks:

• Single-Stock Risk: Overexposure to one company increases vulnerability to company-specific downturns, regardless of market conditions.^{1 2}
• Sector Concentration: P&G’s Consumer Staples focus can lead to overexposure to sector-specific trends.¹³
• Tax Complexity: Selling appreciated stock outright may trigger substantial capital gains taxes, discouraging diversification efforts.^{1 2}

To preserve wealth and minimize risk, it’s essential to diversify in ways that manage tax implications while maintaining the growth potential of a balanced portfolio.

Exchange Funds: A Tax-Efficient Diversification Tool

Exchange funds offer a solution for investors seeking broad diversification without the immediate tax liability of selling stock.^{3 4}

How Exchange Funds Work

1. Pooling Assets: Investors contribute their appreciated shares, such as P&G stock, into a diversified fund alongside other participants.^{3 4}
2. Tax Deferral: By exchanging stock for fund shares, investors defer capital gains taxes until the fund shares are sold.^{3 4}
3. Broad Diversification: The fund holds a variety of stocks, reducing exposure to individual companies or sectors.^{3 4}

Example Application for P&G Stock

Contributing P&G shares to an exchange fund allows a shareholder to shift from a single-stock position to a diversified portfolio without triggering capital gains taxes. This can mitigate risks associated with sector overexposure and company-specific volatility.^{3 4}

Limitations of Exchange Funds

• Liquidity Constraints: Many exchange funds have a lock-up period of up to seven years^{.3 4}
• High Thresholds: Minimum contribution requirements may exclude some investors.^{3 4}
• Limited Customization: These funds provide broad diversification but lack flexibility to tailor investments to individual preferences, such as ESG priorities.^{3 4}

Exchange funds offer a strong foundation for diversification but may benefit from pairing with more dynamic strategies for tailored results.

Standard Direct Indexing: Personalized Diversification with Tax Efficiency

Direct indexing is a modern strategy that allows investors to replicate the composition of an index by owning individual stocks directly. Unlike exchange funds, direct indexing offers customization and tax-efficient portfolio management without relying on pooled funds.^{6 11 12}

How Standard Direct Indexing Works

• Replicating an Index: Investors own individual stocks in a portfolio designed to track an index, such as the S&P 500.^{6 11 12}
• Tax-Loss Harvesting: Portfolio managers systematically sell underperforming stocks to generate tax losses, which offset taxable gains elsewhere in the portfolio.^{6 11 12}
• Customizing Allocations: Investors can exclude certain sectors, overweight specific industries, or align holdings with personal values, such as ESG preferences.^{6 11 12}

Benefits for P&G Stock Diversification

1. Tax-Efficient Transition:some text
   • Selling P&G stock and reallocating proceeds into a direct indexing portfolio provides a path to diversification while minimizing tax impacts through ongoing tax-loss harvesting. ^{6 11 12}
2. Customizable Diversification:some text
   • Investors can personalize their portfolio to align with their risk tolerance, financial goals, and preferences. For example, a P&G retiree might retain partial exposure to Consumer Staples while adding Technology or Healthcare sector stocks.^{6 11 12}
3. No Lock-Up Period:some text
   • Unlike exchange funds, direct indexing portfolios remain fully liquid, allowing investors to make adjustments as needed.^{6 11 12}
4. Broad and Passive Growth Potential:some text
   • Direct indexing captures market returns similar to an index fund while providing the benefits of personalized ownership and tax efficiency.^{6 11 12}

Limitations

• Market-Like Returns: Standard direct indexing aims to match, not outperform, the index. For those seeking alpha, a long-short overlay offers additional potential. ^{6 11 12}

Direct Indexing with Long-Short Strategies

Building on the foundation of standard direct indexing, a long-short overlay adds a performance-driven element by incorporating short positions to hedge risks and seek outperformance.⁷

How It Works

• Long Positions: Retain undervalued or high-performing stocks.7
• Short Positions: Hedge against overvalued or low-performing stocks, sectors, or factors.⁷

This hybrid approach enhances portfolio management by creating opportunities for growth, risk mitigation, and greater tax efficiency.⁷

Benefits for P&G Stock Diversification

1. Enhanced Tax Efficiency:some text
   • Losses from short positions complement tax-loss harvesting from long positions, further reducing taxable gains.⁷
2. Advanced Risk Management:some text
   • Hedging Consumer Staples exposure through short positions reduces over-reliance on sector performance.⁷
3. Opportunities for Outperformance:some text
   • Shorting overvalued stocks while reallocating to undervalued ones creates potential for alpha generation beyond index returns.⁷
4. Dynamic Customization:some text
   • Unlike exchange funds or standard direct indexing, a long-short overlay allows for real-time adjustments based on market trends.⁷

Comparing the Strategies

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Brad Morgan

Hi there! 👋🏼 I'm Brad, a former Procter & Gamble employee turned financial advisor. With a focus on tax planning, I've been a trusted advisor for the P&G community for over ten years.

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