The Hidden Risk of Success: Why It’s Important to Realize Gains

Success can sometimes lead to hidden risks. I often hear investors say, “I know the stock has done incredibly well, but the thought of paying taxes on those gains just kills me. Why would I give Uncle Sam all that money?”

It’s an understandable reaction. No one wants to pay more in taxes than necessary. The temptation is to hold on indefinitely, not because the opportunity remains compelling, but because the cost of selling feels too painful. But here’s the uncomfortable truth: sometimes the best investment decision is to pay the tax bill and take gains off the table. Let’s dive into some of the reasons why it could be beneficial to realize gains.

Markets Have Been Very Good

The last decade has been a remarkable period for equity investors. Over the ten years ending December 31, 2025, the S&P 500 returned 298.3% cumulatively, or 14.8% annualized. More recently, the S&P 500 returned roughly 18% in 2025 after returning 25% in 2024 and 26% in 2023. These are exceptional returns. As a result, many long-term investors are sitting on widespread unrealized gains in their portfolios.

When Success Becomes a Problem

While watching your winners soar feels great, this success can quietly transform into one of the biggest risks in your portfolio. Portfolios that were once well-diversified can become dangerously concentrated in a handful of winning positions.

If you bought shares of a technology stock years ago at a reasonable valuation and it has now grown to represent 20% or 30% of your portfolio, you’re no longer diversified. You’ve essentially put all your eggs in one basket, even if that wasn’t your original plan. The gain feels like validation of a smart decision, but the concentration risk doesn’t care about your track record. One disappointing earnings report, one regulatory change, or one shift in the company operations can wipe out years of gains in a matter of weeks. That’s why it’s important to rebalance and take some chips off the table.

The Record-Breaking Concentration

To illustrate why trimming winners and realizing gains matters, it helps to look at the S&P 500 through the lens of market concentration. We are currently living through one of the most concentrated market environments in modern history. Today, the top 10 stocks in the S&P 500 account for roughly 38% of the index’s total market capitalization. Let that sink in: just ten companies out of 500 now represent more than a third of the entire market.

The chart above puts this concentration into historical context. While today’s level is elevated, it isn’t unprecedented. During the Dot-Com Bubble in 2000, the top 10 stocks made up about 26% of the index, led by names such as Cisco, Intel, and Lucent Technologies. A similar pattern emerged during the “Nifty Fifty” era of the early 1970s, when concentration again hovered near 26%, dominated by companies like Eastman Kodak, Sears, and Xerox. Going back even further, concentration exceeded 40% during the Great Depression, when industrial giants such as AT&T, Standard Oil, and U.S. Steel ruled the market.

What makes today especially notable is not just the level of concentration, but how quickly leadership has changed. As shown in the chart, today’s top 10 is dominated by technology-driven companies like Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, Broadcom, and Tesla. Technology alone now represents roughly 36% of the S&P 500, far more than energy or consumer staples did in past cycles. Six of today’s top 10 stocks were not even in the top 10 just a decade ago, and none of the companies that dominated the index in 1985 remain there today. In fact, one of the largest names from that era, Kodak, ultimately went bankrupt.

Who are the next generation of market leaders? That is not easy to predict. Only time will tell. History makes one thing clear: every generation of market leaders eventually gives way to the next. If you never take the gains from the previous generation of market leaders, your portfolio runs the risk of missing out on “engines” of future growth. By trimming the winners of the past, you free up the capital necessary to capture the wealth being created by the next generation of innovators.

The Cost of Inaction

But what about taxes? Taxes matter, but they should not be the sole driver of portfolio decisions. Consider a real-world type of scenario.

Imagine a client in the 24% federal income tax bracket who purchased shares of Cisco Systems in the mid-1990s at $10 per share. By March 2000, at the peak of the Dot-Com Bubble, those shares had soared to $80. The client held 1,000 shares, turning a $10,000 investment into $80,000.

If the client had sold at the peak and paid capital gains taxes (let’s assume a combined federal and state rate of about 29% at the time), they would have netted approximately $56,700 after taxes. Instead, believing the growth would continue and wanting to avoid the tax bill, they held on.

By October 2002, Cisco had fallen to around $8 per share. The $80,000 position was now worth just $8,000, less than the original investment. It would take Cisco nearly 24 years, until 2025, to finally surpass its 2000 peak. The client, in an effort to avoid a roughly $20,000 tax bill, watched $72,000 in gains evaporate and endured decades of waiting to get back to even.

This isn’t just about Cisco. We’ve seen it with financial stocks after 2008. We’ve witnessed it with numerous “can’t miss” companies that ultimately did miss. Taking the gain and paying the “tax friction” is often the cheaper path to protecting wealth.

How We Manage This Risk

The most successful long-term portfolios are not static. They evolve as markets evolve. We don’t have a crystal ball to see which companies will lead the next decade, but we do know that eventually, there is a changing of the guard. That means trimming winners, reallocating capital, and maintaining diversification, even when it feels uncomfortable.

At Bragg Financial, we don’t have a one-size-fits-all approach or a one-click button to manage portfolios. We look at every client’s situation individually because each portfolio is unique, shaped by different time horizons, tax situations, and personal circumstances.

However, we do follow disciplined guidelines. Our standard approach targets annual capital gains of up to 2% of total portfolio value, allowing us to methodically trim concentrated positions and free capital for further diversification. When a position grows beyond its intended allocation, we consider rebalancing. This isn’t about market timing or predicting which stocks will rise or fall next. It’s about managing risk and ensuring your portfolio continues to reflect your financial goals rather than the whims of market momentum.

We think carefully about the trade-off between paying taxes today versus the risks of maintaining an overweight position. For clients in lower tax brackets, the math often strongly favors taking gains. Even for those in higher brackets, the risk of concentration can outweigh the tax cost.

For investors who plan to pass assets to heirs and receive a step-up in cost basis, the math around taking gains may be different. In some cases, realizing gains during one’s lifetime may not always be necessary or optimal from a tax perspective. That said, even when tax considerations favor holding, concentration risk should still be evaluated carefully. Diversifying could mean passing on a larger portfolio to your heirs.

Because in the end, the goal isn’t to avoid taxes at all costs. The goal is to build and preserve wealth over the long term. And sometimes, the best way to protect your success is to be willing to take some chips off the table.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.