Company Stock Transition to Diversification

[MDW]

Any ideas on the best way to transition from company stock to a diverse portfolio?  The stock has consistently outperformed the S&P and currently has a dividend yield of 2.5%.  The only reason I would want to sell the stock is to provide a more diverse portfolio as I prepare for early retirement.

 

[preben]

Personally I would do it in one swift move - keeping max 10% for a feel-good factor/I work for ME-factor.
(I am not considering taxes here).
The risk of a single company one also WORK for sinking your FIRE is just too big - a double whammy should the company wither and die.
Cheers!

 

[brewer12345]

If you don't want to sell it, you could put a collar on. Sell and out of he money call, buy an out of the moneyput.

 

[playaman]

I relate to this problem well, having sold several hundred shares of my company's stock just yesterday in order to reduce the reality that one-fourth of my net worth is tied into shares of the company.

Like yours, the company with which I am associated has done well (up more than 30% this year), but the stock is highly volatile and I want to be out of it before I retire. I sold at $3 less per share yesterday than the year's high (a few weeks ago), but I think it's better to slowly divest and diversify.

Best wishes.

 

[cute fuzzy bunny]

Sold my doubling/tripling company stock every year and put it into a diversified portfolio. Was a moron for six years until the stock dropped 80%+ in a month. Stock has gone up a bit in the last 5 years since, but my diversified portfolio has trounced it.

I know a lot of people who used to walk around crowing that they still had every share. Some might still be worth millions. A lot would be able to ER if they'd bailed yearly and diversified.

I look at it this way: you're going to get more of the stuff every year, and you can probably also participate in the "free money" employee stock purchase plan if your company offers one. Mine sold us stock quarterly for 15% off. I sold that the next day as well and took my 15%.

If you're not working with hundreds of thousands or milllions of dollars worth, just sell it. Otherwise check with a tax professional regarding the tax implications; might be worth it to spead the sale over 2-3 years to keep out of the 50% bracket I got hammered with every year.

 

[Caroline]

one word: Enron.

More than one word: I sold available shares of my IBM stock one week before it tanked. For once in my life blind luck went in my direction!

On top of that they're laying people off right and left -- I'm still employed thus far but who knows? I may get a "single whammy" in the near future (layoff) but the double whammy of job loss and stock loss won't be a problem for me.

If I were talking about grillions of dollars I might worry about the taxes, but my rationale for selling was that I'd rather pay heavy taxes on a gain than no taxes on a loss.


Best of luck to you,
Caroline

 

[MDW]

Thanks for your input. The tax implications are major right now and will continue to be for the next couple of years. It is emotionally difficult to move from a stock that has performed well to a diversified portfolio that may not perform as well. Mentally I know that I need the diversification.

 

[ats5g]

Thanks for your input. The tax implications are major right now and will continue to be for the next couple of years. It is emotionally difficult to move from a stock that has performed well to a diversified portfolio that may not perform as well. Mentally I know that I need the diversification.

Hi MDW,

This is the difference between strategy and outcome. A strategy is always a good strategy regardless of the outcome. If keeping almost all of your assets in one stock was a good strategy, it would be good no matter if the stock tanked or if it performed good. Naturally, it is not a good strategy. This stock could keep on performing well, or it could perform poorly. Diversification will work with either outcome, plus it won't destroy your chances of ER or retirement like one stock could.

Now, there are probably going to be some people [most likely those whom you work with - possibly daily] that will keep most of their assets in that one stock. And if the stock does well, they're going to say something along the lines of "Nanny Nanny boo boo, I'm rich and you're not as rich." And they could likely use this as some sort of weird "that's why I'm better than you" comparison thing. And it will irk you for a while [perhaps years] until their strategy backfires. And it may motivate you to save more for ER. But it could just have easily gone the other way, and they could be exceedingly poor.

Not too mention that holding most of your assets in the stock of your employer could be a double whammy if the company does bad: you lose your job/income and you don't have any assets from which to live on until the next job or possibly retire. I believe this is what's known as your assets being highly correlated with your "human capital." For example, tech employees may want to overweight value, and stock brokers may not want to own any stocks at all.

- Alec

 

[Yipee-Ki-O]

Five years ago I held a very large position (9000+ shares) in a blue chip drug company and was nearing ER. Not wanting to pay capital gains on my profits was one reason I doggedly held onto the stock as it plunged. Stupidity was probably a bigger factor. And of course I had no idea how far the price would ultimately drop. My advice would be to pay the 15% capital gains tax on your profits and diversify. Then you won't have to look through old 401k statements and ESPP documents if your company stumbles and wonder, "What was I thinking?"

 

[cute fuzzy bunny]

It is emotionally difficult to move from a stock that has performed well

The word 'emotion' belongs nowhere near the word 'investment'. You would do well to fix that.

I could entertain you with quotes I found in an old investment magazine my doctor had in his office a few years back. Like how Enron and Worldcom were 'super blue chip companies that every investor needs to own, at any price...skys the limit on these', or the blazingly positive review of tyco stock in the 1999 time frame, citing its superior diversity and management. Yada yada yada.

My old company was solid blue chip, did nothing bad, no funny business around the balance sheet, good managers, huge profit margins, every factory is like an ATM machine churning out money. Considered so good they might be a monopoly.

Stock dropped from 79 and change (where I sold it) to 11 bucks at one point. Barely over 20 now.

My ex still works there, she had about $7M worth at one point. Probably about a mil now. Not too shabby, but come on...

THATS what will make you kick yourself in the ass on an hourly basis if you stay in a single stock...

 

[HFWR]

Many at my megacorp employer rode company stock up to $200, then down to $13, then up to current $28, and are still 100% co. stock. Still waiting for $200 again...

Hope they're not holding their breaths...

 

[brewer12345]

Thanks for your input.  The tax implications are major right now and will continue to be for the next couple of years.  It is emotionally difficult to move from a stock that has performed well to a diversified portfolio that may not perform as well.  Mentally I know that I need the diversification.

MDW, I personally try not to let the tax tail wag the investment dog, but that hasn't stopped me from avoiding cap gains taxes right through a huge collapse in stock price.

If I were you, I would put on a collar for at least half of the position. What you do is buy a put option and pay for it by selling a call option. For example, say XYZ Co. is selling for $50. I am way overexposed to the stock, but can't bring myself to sell. To hedge my bets, I buy put options to sell at $40, paying $1 a share to do this. I don't want to actually put up the cash, so I pay for it by selling a call option at $60 for $1 a share. That way, if the stock price collapses, I can still sell for 40, but if the stock goes over 60 I have to sell at 60. You keep the dividend and any gain or loss between 40 and 60, but you are protected from disaster. You pay for it by giving up some potential upside.

 

[laurence]

My DW's company does options as well. Despite the phenominal performance of the stock, we had picked a target price, and when it hit, we would sell. Bit the bullet on the taxes and moved on. Too many of her coworkers lost out trying to work around the tax burden. If you absolutely can't bear the thought of selling them all, sell half.

 

[moghopper]

More than one word: I sold available shares of my IBM stock one week before it tanked. For once in my life blind luck went in my direction!

Wish I would have... but it wasn't so bad, since I sell most everything about every other year. I should have picked odds instead of evens, I guess.

 

[MDW]

brewer12345,

Thanks for the idea.  That is the most creative solution I have heard from anyone on the subject.  It is a perfect solution for me because I have target high and low values that will trigger a sale regardless of the tax implications.

MDW

 

[brewer12345]

Happy to help. If you want more detailed suggestions, send me a message. You can either di this trade yourself or pay someone, but its not that hard, IMO.

 

[Spanky]

Stock dropped from 79 and change (where I sold it) to 11 bucks at one point. Barely over 20 now.

it sounds like CISCO System, Inc. It used to be have the market of router. Now they are so cheap and are manufactured by many.

 

[Animorph]

I was able to find other stocks I though had similar or better prospects than my company stock. I tracked them during 2001-2003. When any of them dropped to a new low new stock/old stock price ratio for the past 2 years, I sold my company stock and bought enough of the new stock to make up about 2.5% of my portfolio. If the ratio fell another 15%, I bought the same number of shares again. I felt I was getting a good short-term deal, and wasn't hurting my long-term prospects either.

I'm about 40% ahead of where I'd be without diversification, including tax costs. And my cost basis is now much higher. I no longer have any of the original company stock.

As far as taxes go, watch out for the deduction and exemption exclusions as your AGI goes up. Your effective capital gains rate can be more like 25% than 15%. However, if your AGI is high enough (including selling lots of company stock), eventually the exclusions max out and the capital gains rate is back at 15%. You might want to try to sell lots of stock in one year if you can hit that 15% rate. Otherwise, you just have to hold your nose and pay the taxes. Your cost basis goes up, so if you look at after-tax value, it will seem a little better. The 15% rate is scheduled to disappear in a few years, so convince yourself you need to take advantage of it now.

Good luck!