Q: I have accumulated my company’s stock through the employee stock purchase plan, an executive benefit program, and I have stock options. I’m also buying it in my personal investment account. Now that I’m considering retirement in a couple of years, I need advice.
A: You are not alone. Many people who really admire their employer have big positions in their company stock. Unfortunately, that comes with great risk. Another factor is your employment; it, too, is dependent on your company. Now may be a good time to start diversifying.
Although many get rich with a single stock, nearing retirement is not a good time to be taking extra risk. Diversification will lower that risk.
Although it’s difficult to say “how much is too much” of a single stock, generally any position making up more than 10%-15% of your portfolio should be considered risky. This is because stock concentrations may lead to more exposure to volatility, potentially less liquidity and usually higher risk than a diversified portfolio.
One way of thinking about this risk is realizing that only about half of the Fortune 500 companies that made up the list in 2000 are still listed today. Remember Yahoo!, Borders, Blackberry, Kodak, Synergy Pharmaceuticals, Lehman Brothers, WorldCom, Enron, Washington Mutual or Circuit City?
Single stock positions require significantly more monitoring, potentially causing untimely and poor decisions. A popular phrase in the financial world is that money is like a bar of soap. The more you handle it, the less you’ll have. Many investors choose to “buy low and sell high,” but this is not always easy to predict.
Diversification spreads out the risk. A good strategy is to review the asset classes and categories such as value stocks versus growth stocks. Also, no single sector should be overweighted; recent tumbles in technology and energy stocks reinforce this point. Size matters, too, with small-cap stocks — or those with a market capitalization of between $300 million and $2 billion — having more volatility.
Since you’re retiring soon, consider a net unrealized appreciation (NUA) election before rolling company stock out of your 401(k). This advantageous tax strategy permits a portion of the company stock in the retirement plan to be taxed as long-term capital gains when the stock is sold.
However, if the NUA strategy won’t save you money from tax, you could sell the stock in the 401(k) or the IRA because it’s not a taxable event. Only withdrawals are taxed.
If it is an appreciated stock, it is an ideal candidate for charitable donations. It must be transferred directly from a taxable account to the charity’s account to avoid paying the capital gains tax.
If it is a low-basis stock, you’ll have a tax bill when the stock is sold. Long-term capital gains rates are still low, however: they range from zero, 15% (most common), and 20% (with the 3.8% net investment income tax) for higher-wage earners.
If you’re unwilling to diversify and pay tax, then consider a pooled fund where like-minded investors form a partnership or investment club, and the group of investors pools their shares.
When stock is inherited, it usually gets a step-up to the current share price on the date of the owner’s death.
Assess your situation, always review tax consequences and don’t let emotions — such as adoration for your company — drive your portfolio. Unfortunately, bad things can happen to good, well-loved companies.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or email@example.com.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Individuals should reach out to a qualified financial professional who can provide specific advice on annuities to determine if the above information is applicable. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®.
This article originally appeared on Florida Today: Having too much stock in one company, like your employer, is risky