FINANCE Q&A

Financial Q&A: Holding single stock can be too risky

Dan Moisand
FOR FLORIDA TODAY

Question: Many years ago, my father gave me stock in his old employer. It has done well but I am concerned that I have too many eggs in that one basket. I think I should sell but I don't want to. Dad passed away a couple years ago and keeping the stock makes me feel connected to him. Plus I don't want to pay the taxes. Any suggestions?

Answer: I can appreciate you wanting to keep the connection to your father. Do you really have to keep all of the stock to maintain that connection?

The first thing to consider is what happens to your financial condition if the stock drops significantly in value. How far down must the price go before you are financially insecure? Would your dad have wanted you to bet your financial security on this one company? Spending some time on these issues may help you figure out how much stock to keep.

It doesn't matter why the price of the stock drops, if you have too much of your holdings in that stock, you have a problem.

Diversification lowers the odds of devastating losses. Individual stocks are roughly twice as volatile as the overall stock market. In 2008, about 25 percent of U.S.-listed stocks lost at least 75 percent of their value. But less than .06 percent of the more than 6,600 open-ended mutual funds that invest in U.S. stocks lost more than 75 percent that year.

The simplest approach is to sell some shares. The difference between what you receive from the sale and the "cost basis" is a capital gain. As a gift, the basis calculation starts with what he paid for the stock. The calculation for inherited shares starts with the value at the date of death.

Do not fear capital gain taxes. The highest-income taxpayers pay 23.8 percent on long term capital gains versus more than 40 percent on ordinary income. To the extent you are in the 15 percent tax bracket, no capital gains taxes are due. In between, most pay 15 percent.

Even with the low rates, there are many ways to reduce the taxes due further. Common approaches include selling over more than one tax year and gifting to family or other parties in a lower tax bracket. Because many charities are tax-exempt, donating appreciated shares can be a great option. There are a variety of charitable trusts and other devices that can both help a charity and benefit you or your family. All techniques have pros and cons so it is best to make these choices in the context of your overall financial plans.

Dan Moisand, CFP is a past national president of the Financial Planning Association and has been featured as one of America's top financial planners by at least 10 financial planning publications, dan@moisandfitzgerald.com 321-253-5400, Ext. 101