Put All Your Eggs In One Basket?

Ironically, I have had some review meetings recently with a few clients that have concentrated stock positions in their company stock. Coincidentally, each of these client's company stock has performed very well over the years (along with the rest of the stock market) which has benefitted their financial plan and, in some cases, has put them in a situation where they now may be able to retire earlier than we had factored into their plan originally. One of the strategies that I have recommended to these clients over the past few years is to sell a certain percentage, maybe 25%, of their company stock each year & then diversify the proceeds according to their risk tolerant allocation mix. This, in turn, would reduce the risk in their overall asset allocation mix. Some of these clients have resisted this strategy. They've replied with comments like:

• "Things still look good for the company, I think it is going higher. I'll just hang on to all of it for now and keep an eye on it."
• "I don't want to pay all those capital gain taxes by selling some now."

While I understand that they are somewhat emotionally attached and feel they have a tight pulse on the company and probably do, no one has a crystal ball. And in terms of the capital gains tax, as the legendary investor, Peter Lynch (former money manger of Fidelity Magellan fund) said ...capital gains tax is a good problem to have… you are getting taxed on money you didn't have in the first place. So while you do have to take taxes into consideration and I work closely with our client's CPA's when doing so, what is the alternative solution to avoid paying the capital gain tax, wait until you have a loss in the stock or it goes way down??

I have a client that owned a lot of his company stock and stock options several years ago and was still receiving stock options every year, so he had accumulated quite a substantial position in the stock and this put him in a nice position to retire earlier than he had anticipated. Time and time again, I did advise him to sell a certain percentage a year, just to diversify a little… he still would have a good position in the stock but it would be smart and prudent to "prune the rose bush" a little every year. He did not heed the advice and the stock plummeted and is now trading in the low single digits. Need I say anymore.

Let's all remember what happened to other companies we thought would never go down substantially, i.e. Worldcom, Enron, GM just to name a few. In fact, out of the 30 companies that were in the Dow Jones Industrial Average in 1975, only about 8 of those companies are left today. The old adage "Hogs get fat and pigs get slaughtered" still holds true today.