End of year hankie-biting: are my assumptions true?

[fickle]

Short of clairvoyance there is no right answer for this, but I am trying to make sure my unknowns are all unknowns, and there are no knowns I'm missing because I'm such a newb.

I'm trying, of course, to balance gain with risk, but the end of the year is approaching and I'm weighing the now vs. 2013.

I have quite a bit of a single stock, JEF. I am not planning on holding onto it forever. My cost basis is 5% (no typo) of what the stock is worth now.

1) It has had a decent year and a good 4th quarter. Today it was 18 and change per share.
2) Its dividends are being paid out this quarter to shareholders who owned it on the 21 Dec (today).
3) It is being bought by Leucadia, LUK, which is 23.84 a share today. I think this is taking place in ?March 2013?
4) LUK will be offering 0.81 shares of LUK for each share of JEF, **but I have no idea which day this will be set at, and don't know if anyone does**, so I don't really know exactly how much the JEF stock will be worth. It won't be radically different, but with enough shares this is not nothing.
5) The more I read, the more it seems the capital gain rates will go up 5% next year.
6) The dividends JEF has been providing will no longer be qualified, quite possibly, and taxed as income.
7) My tax bracket could well be going up.

I am inclined to think there are too many risks and unknowns for me to be hanging on to 1/7 of my portfolio just to hope I can get a better price in the next couple of years. Is this situation as shifting as it seems to my novice eyes?
TIA.

[Clever_Username]

Regardless of which of your assumptions turn(s) out to be true, it seems you're uncomfortable with 1/7 of your portfolio tied up in a single stock. I'd be uncomfortable in that situation, too.

No one knows whether or not the capital gains rate will go up, down, or stay the same next year. It's pointless to speculate.

However, owning JEF is clearly a high risk, anxiety-producing situation for you. Why not sell it and use the proceeds to diversify your portfolio? There are plenty of high-quality, inexpensive ways to do that (many of which are advocated on this board frequently). This is also a good opportunity to look at your risk tolerance in deciding how much of your portfolio should be in stocks in the future.

[cheese_breath]

I am inclined to think there are too many risks and unknowns for me to be hanging on to 1/7 of my portfolio just to hope I can get a better price in the next couple of years.

Forget about your 7 point analysis. Fourteen percent of your portfolio in a single stock is too much risk to carry if you're not independently wealthy and can afford a potential big loss. And don't think that can't happen. I and others have thought the same thing about single stocks we owned only to find out otherwise to our loss.

[fickle]

R

However, owning JEF is clearly a high risk, anxiety-producing situation for you.

In an amusing thought, owning it for more than a decade has not produced any anxiety in me. It's the selling that is stressing me out.

[sscritic]

You can sell some and keep some. You can pay some cap gain tax in 2012 and some cap gain tax (or none) in 2013. It's not an all or nothing proposition.

[BolderBoy]

So you are emotionally involved with that stock, eh?

In another thread someone posted some wisdom about that, 'Don't become emotionally involved with your investing; it may cheat on you.'

[letsgobobby]

Greed is the *only* reason you are still holding this stock.

Objectively you should sell at least 2/3 of it immediately. That would bring your holding down to just under 5%, a reasonable position. The rest you will have sold at the lowest capital gains rates in history. What could be better?

[nedsaid]

It is like the Peter Lynch saying that investors should trade their stocks and keep their wives. Too often, people do the opposite.

It is a common human fault to "marry" our stocks, particularly if they have performed well and we have owned them for a long time. In any case, 14 percent in one stock is way too much.

You can sell it off in stages. It doesn't have to be an all or nothing decision.

[baw703916]

I'm pretty sure the merger will be a taxable event for you (at least, that was the case for every individual stock that I ever owned that ended up being a merger target). If you hang on to it and have your shares exchanged for shares of the merger partner, then as far as the IRS is concerned, it's just like you sold your current position and bought the new stock. If you don't intend to hang on to the new stock, you're better off just selling the current one at some point before the merger is finalized.

The information to shareholders regarding the merger should say if it is a "taxable event". I'm assuming it is, but you should verify this.

So essentially you either take the capital gains now, or in 2013 before or in March, or some combination. There isn't much value in deferring for all of three months. I would be inclined to say just take it now, but some things might depend on your situation. Would taking it all in 2012 bump you into a higher tax bracket, that you could avoid by splitting it up? Make you subject to AMT? Boost your AGI so much that something else would be impacted?

[fickle]

[quote="baw703916"]I'm pretty sure the merger will be a taxable event for you (at least, that was the case for every individual stock that I ever owned that ended up being a merger target).

The information to shareholders regarding the merger should say if it is a "taxable event". I'm assuming it is, but you should verify this.

/quote]

In this case it is a not, but the point is moot, as I have decided to sell off before the merger. This has been a fairly juicy tick hanging off my dog, but it is bigger than the dog's back leg now, and surgical intervention is needed. I thank you all for standing by while I chewed my hankie. No hankies were harmed.

[baw703916]

I'm pretty sure the merger will be a taxable event for you (at least, that was the case for every individual stock that I ever owned that ended up being a merger target).

The information to shareholders regarding the merger should say if it is a "taxable event". I'm assuming it is, but you should verify this.

In this case it is a not, but the point is moot, as I have decided to sell off before the merger. This has been a fairly juicy tick hanging off my dog, but it is bigger than the dog's back leg now, and surgical intervention is needed. I thank you all for standing by while I chewed my hankie. No hankies were harmed.

OK, thanks for the clarification. I don't pretend to understand under what conditions a merger is a taxable event.

I would advise, before the end of the year, firing up your tax software, putting in approximate numbers, and seeing whether there's an obvious reason to defer some of the gains to 2013, vs. taking them in 2012. What the tax code will actually be in 2013 in of course anybody's guess. It's probably best to take gains in 2012 unless the tax software suggests an obvious reason to defer some of them.

Best wishes,
Brad

[Dandy]

If you are hankie biting about owning an individual stock you are not a "professional Investor" (whatever that might be). The "pros" have a specific reason to buy a stock and a target price or event that will trigger a sell to take profits. I am not a pro. I don't really believe there are too many successful pros. So to paraphrase a saying I've read: If you don't know what you are doing the stock market is an expensive place to learn.

I think that is why most? bogleheads avoid owning individual stocks and try to 'buy the market" by investing in mostly low cost broad based index funds. Owning an individal stock with substantial gains (in a taxable account) creates an issue as to when to sell. Do I sell now and get a large cap gain? The fear of paying the cap gain tax can lead you to hold on -- that is what people in my former company did with their company stock. They held on as it went from 120 to about 8. It is now about 17. My friend still is holding on despite advice long ago from a trusted money manager to get out. Of course he now has a great potential tax loss to offset gains. Somehow paying a large cap gain doesn't seem so bad compaed to having a large potential tax loss. I would advise gettng out of your individual stock. Maybe some in 2012 and the rest in 2013 to spread out the tax hit.