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Is Concentrated Stock Holding a Bad Idea?

A reader writes in, asking:

“You wrote recently about it being a bad idea to own a significant amount of stock of your employer. What about if you’re retired? In my case, I have a large portion of my portfolio in a taxable account in the stock of my former employer. Because it’s taxable, I’d have to pay tax to sell it. And if I never spend the money, my heirs can inherit the stock and get a step up rather than having to pay tax.”

The fact that you’re no longer employed by that company makes it significantly less risky because now it’s just your portfolio rather than both your portfolio and your job being tied to that company.

In other words, owning a lot of stock of your former employer is no worse than owning a lot of stock of any single company. (There would be an exception in the case of people who are retired but who still have a pension that is paid for by the former employer.)

That said, having a significant part of your portfolio in any individual stock can still be dangerous, depending on circumstances. The key question: How problematic would it be if the stock collapses? If your Social Security (and other non-portfolio income, if applicable) covers all of your needs, then it’s a very different situation than if a large portion of your living expenses must be covered by your portfolio and this stock makes up a large part of your portfolio.

With regard to the tax consequences of selling the stock, important questions to consider would be:

  • How large is the unrealized capital gain,
  • What would be the tax rate on the capital gain (most importantly, any long-term capital gains in the 15% tax bracket or below are untaxed and therefore not a problem), and
  • Are there any shares for which the capital gain isn’t very large (e.g. because they were bought toward the end of your career and the stock hasn’t done much since then, or because they were purchased with automatic dividend reinvestment)?

If there are shares for which the cost of selling would be minimal (either because the gain is small or the tax rate is very low), it’s very likely a good idea to go ahead and sell those shares in order to diversify.

For shares for which the cost of selling would be significant, the key question is how likely it is that your heirs will be inheriting the shares (and receiving a step-up in cost basis). The more likely it is that the shares will be left to heirs (rather than liquidated and spent during your lifetime), the more sense it likely makes to hold on to them.

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