Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Cost of diversification
Old 05-08-2006, 10:23 AM   #1
Confused about dryer sheets
 
Join Date: May 2006
Posts: 1
Cost of diversification

Short time lurker, first time poster

A majority of my holdings (stock options and employee purchase) are in a company that I'm currently work for and I want to diversify my portfolio a bit by selling some of the shares and buy other stocks. However, I'm wondering if it's really worthed. For instance, if I was to sell $1000 of my company's stock, I would get hit with a 15% (I have them for 1+ year) capital gain tax + $20 trading fee. Add that to the $20 charge to buy the new shares, we're talking about $190 to diversify. I don't want to put all my eggs in one basket, but that seems to be a steep price to pay.

I'm a newbie to investing, so I wonder if the people here have a different opinions on this?

Thanks

__________________

__________________
Boltsfan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Cost of diversification
Old 05-08-2006, 10:38 AM   #2
Full time employment: Posting here.
kaudrey's Avatar
 
Join Date: Feb 2006
Location: Alexandria, Va
Posts: 943
Re: Cost of diversification

I have one word: Enron.

The cost of NOT diversifying could be your entire portfolio. Spend the money now to avoid potential disaster later.

And, if you are new to investing, I'd suggest buying low-cost mutual funds instead of individual stocks - gives you instant diversification. If you can do this at Vanguard, Fidelity, or even Schwab, the purchases won't cost incur a fee. If your current holdings are in a 401(k) type plan, see what mutual fund options are available (still, shouldn't be a fee I don't think).

Karen
__________________

__________________
Two roads diverged in a wood, and I - I took the one less travelled by...
kaudrey is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 12:00 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Posts: 1,487
Re: Cost of diversification

not only is your portfolio entirely dependent on the fortunes of the company, but so too is your job!* there's an enormous risk here.

I'd not be overly concerned about the 15% tax ... if you delay, the tax rate might well be higher.* The $20 trading fee, as a %, would be minimized by selling a larger $ amount.*

I agree with kaudrey that the primary alternative to consider would be a broadly diversified mutual fund.

All in all, keeping all your eggs in one basket could well prove to be a much, much steeper price to pay.

All that said, if the total amount of $ invested is relatively minor, it might be a bit less expensive to discontinue any future employee purchases and direct those $ directly to a mutual fund; unless, of course, there is a discount of some sort that applies to employee purchases.
__________________
d is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 02:03 PM   #4
Thinks s/he gets paid by the post
free4now's Avatar
 
Join Date: Dec 2005
Posts: 1,225
Re: Cost of diversification

Diversifying is worthwhile. The cap gains tax will have to be paid eventually, and 15% might be a good deal now. By paying it now you only lose the compounding on that 15%... probably just a percent or two per year in total losses, which I think is worth the benefits of diversifying.

On the other hand if your portfolio is small relative to your yearly salary, then you might just accept the extra risk since losing your portfolio wouldn't be devastating.
__________________
free4now is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 02:13 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Re: Cost of diversification

It may also depend just how young you are. It is a "good thing" to diversify and if you sell the stocks as you plan you will have instant diversification. But another way to do this is over time is to buy different stocks/funds. I have a choice of several index funds at work and I rebalance with new purchases rather than moving money between them. If you have time this will work, has low fees and can provide good diversification and you can be rebalancing by buying what is currently cheap or out of favor.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 02:22 PM   #6
Recycles dryer sheets
dusk_to_dawn's Avatar
 
Join Date: Dec 2005
Posts: 163
Re: Cost of diversification

Quote:
Originally Posted by Boltsfan
Short time lurker, first time poster

A majority of my holdings (stock options and employee purchase) are in a company that I'm currently work for and I want to diversify my portfolio a bit by selling some of the shares and buy other stocks. However, I'm wondering if it's really worthed.
Good friend of mine was a Pilot for Delta. He used to be real happy with the Delta stock in his retirement plan. Delta stock is now .66. Remember what Will Rogers once said, "I'm not so much concerned with the return on my money as I am the return OF my money."
__________________
The way I see it, you got two choices. You either gotta get busy livin'...or get busy dyin'.
dusk_to_dawn is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 02:26 PM   #7
Recycles dryer sheets
perinova's Avatar
 
Join Date: Apr 2006
Posts: 424
Re: Cost of diversification

If you are concerned about cap gains means you already have a pretty good appreciation on this stock. Time to sell, and to purchase something with good value. You don't have to put the money in an individual stock either you can use a low cost no load mutual fund: no trading fee.
And I agree about all other comments on this post.
__________________
perinova is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 03:35 PM   #8
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Re: Cost of diversification

Quote:
Originally Posted by Boltsfan
For instance, if I was to sell $1000 of my company's stock, I would get hit with a 15% (I have them for 1+ year) capital gain tax + $20 trading fee. Add that to the $20 charge to buy the new shares, we're talking about $190 to diversify.
I realize that you just threw out numbers as an example.....however, it appears that you are confusing 15% tax on gains versus 15% tax on the whole amount.

Your illustration includes $150 tax on $1,000 in stock total value, which is incorrect.

If we are just talking about a few thousand $, (and it's a stable company earning money), I would simply let it ride and divert new investment capital to mutual funds.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Re: Cost of diversification
Old 05-08-2006, 06:52 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Re: Cost of diversification

I had the same problem in 2001, a whole lot of stock and options of a tech company, with practically $0 basis cost on the stock. Most of my net worth. I liked the company prospects, but that is a lot of risk.

I finally decided that I could find other companies that I liked just as well. I went through a screening process and found other stocks I liked. Then I plotted the ratio of the new stock's price versus my stock's price. When the ratio hit new lows looking back for at least a year, I switched about 2.5% of my total value to the new stock. If it went down more, I bought the same number of shares again. You can do that and feel good about it regardless of the price level of your stock.

It took a while, and the stock market was not kind to my stock, but some other good stocks were always doing worse. Actually, being down was good because I paid less tax for the exchange! I think I took over a year to complete the exchange. But I made up the tax costs fairly quickly, less than a year, and I'm still better off. My stock never did go through the roof like my bosses kept telling me it would! It's done OK, but it would have been a really wild ride.

I was looking mostly at depressed tech stocks at the time, with not a whole lot of diversification other than outside my own company. You could do something similar with a mutual fund, it just wouldn't be as exciting. If the ratio looks good, you're buying low. So you could add to a mutual fund whenever your stock is doing well. www.stockcharts.com has a "perf chart" that can plot the ratio over time for you, which is handy.

Dan
__________________

__________________
Animorph is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The REAL Cost of Healthcare Premium Caps ScaredtoQuit FIRE and Money 25 06-18-2007 08:46 PM
Cost of kids accountingsucks Young Dreamers 24 06-21-2006 07:37 AM
Global vs local diversification donheff FIRE and Money 2 04-28-2006 06:10 AM
Low cost funds into ETFs? Olav23 FIRE and Money 26 07-06-2005 10:42 PM
Cost of diversification amt FIRE and Money 2 05-28-2004 09:11 PM

 

 
All times are GMT -6. The time now is 01:16 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.