Cost of diversification

[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. 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

 

[kaudrey]

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

 

[d]

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.

 

[free4now]

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.

 

[yakers]

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.

 

[dusk_to_dawn]

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."

 

[perinova]

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.

 

[MooreBonds]

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.

 

[Animorph]

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