July 2021
Financial Planning

Is it really a problem to have too much of a good thing? Well, with concentrated stock positions, you may find yourself in that very situation. Maybe you bought Apple stock in the early 1980s after it went public. Maybe you’ve worked at the same company for years, and you’ve built up a pile of company equity. Maybe an IPO served as your personal jackpot. Or maybe you inherited some stock that has since skyrocketed in value. No matter how you got there, if you’ve made a decent chunk of change (or more) thanks to a certain stock in your investment portfolio, you might be resisting the idea of parting with it. After all, hanging on has worked out pretty well for you so far (not to mention those capital gains you’d have to pay if you sold).

The fear of missing out on the upside is real. What many people forget is the potential downside: Only a small number of companies outperform the broad market over the long term. And the risk of a permanent drop in a stock’s value is real, even if it does feel like the hot company this year or even this decade. So … why should you consider diversifying? Well, concentrated stock may make you rich, but diversification is meant to help you stay that way.

Here are 4 ways that you can diversify a concentrated Stock Position:

1. Incrementally Selling Shares - A sale of stock is might be the most appropriate and simplest means of reducing a concentrated stock position. Tax considerations, potential market impact, reinvestment of proceeds and timing of sales, however, are all elements for you to consider within the context of your overall financial plan.

2. Using Options to Hedge the Position - You also might consider using singular or multiple combinations of options to help guard against a significant drop in stock value. For example, purchasing a put option is similar to buying insurance against the risk of loss in your stock. A protective put option provides an investor the right to sell all or a portion of his or her shares at a predetermined price. Similar to insurance, if the price of the stock goes up, the value of the option could expire worthless. In addition to purchasing puts, selling call options can provide income against a decline in share value.

3. Gifts of Stock - When gifting to your children or grandchildren, they will not receive a step up in cost basis of the stock, unfortunately; however, if the person receiving the gift is in a lower tax bracket (such as the 10% or 15% marginal tax bracket), he or she will not pay long-term capital gains tax on the sale of the stock. 

4. Donate Shares to a Trust or Charity - By donating highly appreciated stock to a charitable remainder trust (CRT), you might be eligible to receive a tax deduction at the time of the contribution. The trust’s future payout rate may be managed in a manner conducive to income objectives or tax planning, as appropriate. When you donate stock to charity, you’ll generally take a tax deduction for the full fair market value. And because you are donating stock, your contribution and tax deduction may instantly increase over 20%.

Concentrated stock positions can represent a fortunate outcome for some investors but do come with significant potential risks. And, to help minimize risk, they should be part of an overall, diversified portfolio. A Copperwynd, we will work to develop a strategy to help manage your concentrated position.

If you have questions, please contact us.

MARKET UDPATE
COLLEGE AND TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the July 2021 Newsletter: CLICK HERE