Larry Ellison, the cofounder of Oracle Corporation, recently became the world’s wealthiest person.

Oracle, a software company, isn’t nearly as large as its peers. So how did Ellison’s net worth manage to surpass that of Bill Gates, Jeff Bezos and the founders of other much larger companies?

The answer is simple: In the nearly 50 years since Oracle’s founding, Ellison has almost never sold a share of his company’s stock. According to an analysis by Smart Insider, which tracks executives’ share sales, Ellison has sold only a tiny fraction—less than 2%—of his shares over the years. Instead, he mostly just borrows against his shares to meet his expenses. The result is that today he still owns more than 40% of the company, worth nearly $400 billion.

In contrast, Ellison’s Silicon Valley peers have sold, or given away, shares much more aggressively. Mark Zuckerberg now owns less than 15% of Meta. Jensen Huang’s stake in Nvidia is under 4%. And Bill Gates’s stake in Microsoft is down to just 1%, following years of systematic sales and gifts to his foundation.

Ellison’s unwavering bet on Oracle has worked out well, but the company’s fortunes easily could have gone the other way. That’s why, for anyone else with a concentrated position in a single stock like this, diversification is what I’d recommend in virtually every case.

The obstacle for many people, though, is the prospective tax bill that can result from selling a concentrated holding. At the federal level, the top capital gains tax bracket is 20%. At that level, an additional 3.8% surtax would apply, plus state—and even city—taxes in many places.

How can you strike a balance between managing risk and limiting taxes? Fortunately, the range of available options has expanded in recent years. If there’s a concentrated stock position in your portfolio, here are steps to consider.

I’d start by assessing the risk posed by this stock. While there’s no single litmus test, you could ask these questions:

• How large a portion of your assets does the stock represent? As a rule of thumb, holdings that top 5% are worth closer examination.
• How does the weight of the stock in your portfolio compare to its weight in a market index like the S&P 500? Suppose, for example, you own Apple shares that account for 7% of your portfolio. That seems like a lot. But because Apple is so large, its weight in the S&P 500 is actually in the neighborhood of 7%. For that reason, a holding of that size in Apple might not be such a concern. On the other hand, a 7% position in a smaller company would merit further review.
• How diversified is the rest of your portfolio? Because stocks in the same industry tend to move together, you’d want to assess the level of industry diversification across your holdings. Counterintuitively, a portfolio of 30 stocks could be riskier than a group of just 10. What matters more than the number of holdings is the degree to which they’re diversified across the economy.
• Is the stock in question your employer’s stock? If so, that would be a point in favor of diversifying more quickly.
• How much would a loss impact you? As with most questions in personal finance, there are two answers to consider: how it might affect you in dollar terms, and the degree to which a loss would simply be upsetting. Both are important.

If you determine that the stock does represent a risk, the next step is to assess the tax situation. There are a number of questions to ask here: How highly appreciated is the stock? What would the tax be if you exited the entire position? Would it push your income into the next capital gains tax bracket? Do you own multiple tax lots, which could provide more flexibility?

If the answer is that the tax bill would be significant, then the next step would be to consider the menu of strategies to reduce the holding. For starters, you’d want to decide on a target percentage for the stock. I recommend bringing individual stocks down to somewhere between 5% and 10% of one’s net worth to manage risk. Why? The great investor Bernard Baruch put it this way: “Sell to the sleeping point.” That answer will be different for each of us, but that’s the gauge I’d use.

How can you begin reducing your holdings?

Many of the strategies are well known. You could sell a fixed number of shares each month and maybe accelerate those sales when the share price is strong. Or you could plan your sales so that you’d stay inside a particular tax bracket. And when you reinvest, you could employ a direct indexing service to diversify without inadvertently buying back the stock you’d just sold.

If you have charitable intentions, you could donate shares to a donor-advised fund, thus sidestepping the capital gains and capturing a deduction on the donation.

If you have adult children who are in lower tax brackets, you could gift them shares.

A somewhat more involved strategy would be to move the stock into what’s known as an exchange fund. How do these work? Imagine three friends. One has a concentrated position in Apple, another has a big holding in Amazon and the third has a big stake in Microsoft. Individually, they are each bearing a lot of risk. But if they contribute their shares into a common pool, the result would be instant diversification. They’d each own a third of a three-stock portfolio instead of just a single stock.

In reality, an exchange fund would have many more participants and many more stocks, providing an even greater benefit than in this simplified example.

Exchange funds have been around for years, but as noted recently in The Wall Street Journal, new competition has driven down the cost of these services. They can still be a bit pricey, at 0.4% to 0.9% per year, but investors are only obligated to remain in the fund for seven years. After that, they’re free to exit the fund, taking with them a pro rata share of the diversified portfolio.

If that seven-year lockup is a deterrent, there’s a new option to consider. A firm called Alpha Architect has devised a new ETF structure to help with concentrated stock holdings. This past summer, it launched an ETF (ticker: AAUS) that functions similarly to an exchange fund but with a few wrinkles. On the one hand, the requirements for entry are more stringent, but in exchange for that, they offer two key advantages: First, they don’t require a seven-year commitment. Investors are free to sell the ETF at any time. And second, the fees are much lower, at just 0.15%. Alpha Architect is launching its second such fund later this year (ticker: AAEQ). While this construct is new, it’s certainly worth watching.​