Mar 4, 2025
Imagine an investment you made years ago is highly successful and now accounts for an outsized chunk of your portfolio. Should you reduce your risk of overexposure to that one stock and sell some of it? Or should you sit on the stock to avoid capital gains taxes?
If you picked the latter, millionaire Kevin O’Leary thinks you’re making a critical mistake. The Shark Tank star laid out his philosophy in a 2020 interview with YouTuber Graham Stephan.
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“The fact that you have to worry about taxes is a wonderful thing. It means you’re making money,” he said. “But to say, ‘Oh I don't want to sell stock that's now 11% of my portfolio because I don't want to take the tax hit’ — you will pay a brutal price for that.”
Here’s why tax efficiency is important but not the top priority for wealthy investors like O’Leary.
Risks beyond taxes
The good thing about costs associated with capital gains taxes is that they’re fixed and predictable, with a rate of 15% for most people reporting income from $47,000 to $550,000, and 20% for those with ultra-high income, according to the IRS. You can work with a financial adviser to calculate your tax liability before you decide to sell.
In contrast, unlike taxes, the market is volatile and unpredictable, meaning the costs associated with holding an individual stock could be much greater than the capital gains tax you pay on selling it.
For example, Tesla stock lost 42.5% of its value in just a few weeks between December 2024 and February 2025. Selling that stock and taking the 15 to 20% capital gains tax hit before that dip would have been far less costly for someone who is overexposed to Tesla stock.
This is why investors like O’Leary believe diversification is more important than tax savings.
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Setting guardrails for your portfolio
To limit volatility and risk in his portfolio, O’Leary told Stephan about his simple rule of thumb.
“I never let one asset class ever become more than 20% of my net worth,” he said. “So if that asset class really has a hard time it can't take you out of business.”
He claims to review his entire portfolio every 90 days to trim individual asset classes and maintain balance, regardless of the tax implications.
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Most young investors don’t seem to have such guardrails on their portfolio, according to a recent report by Empower.
Investors in their 20s, 30s and 40s have roughly 43% of their assets in U.S. stocks and only 8% in foreign stocks. This cohort also has a bond allocation of less than 6%.
Meanwhile, investors in their 20s and 30s hold 27.4% and 24.6% of their assets in cash respectively.
Diversifying your portfolio to a broader mix of asset classes such as cryptocurrencies, gold or real estate could reduce the volatility of your overall portfolio and put you on a more robust path to financial freedom.
Of course, maximizing the use of tax-sheltered accounts such as a 401(k) plan or a Roth IRA also mitigates tax liabilities when you rebalance your portfolio.
For assets held in taxable accounts, speak to a financial adviser to see if you can lower your liability with tax-loss harvesting. This is a way to offset capital gainss on investments that have gained significant value by selling investments that have dropped in value.
This technique gives you more wriggle room to rebalance your portfolio regularly, just as O’Leary would recommend.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
