Sell "stable" stocks for index?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Sell "stable" stocks for index?

Post by sawhorse »

A large chunk of my taxable money is in individual large cap stocks I bought years ago. Major holdings are Archer Daniel Midlands, Exxon, Johnson & Johnson, Procter & Gamble, Sysco, Toyota, Waste Management.

If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund? The portfolio is less volatile than an S&P 500 index fund, and the stocks all give good dividends. Weighted beta is 0.82 and weighted dividends is 2.87%. I'm pretty sure this is less volatile than a Dow Jones index fund too, as the Dow stocks in my portfolio are less volatile than the Dow 30 average.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Sell "stable" stocks for index?

Post by ogd »

If you desire more stability, this can be accomplished by diluting the S&P with government bonds.

The extra stability is then supported by the US government or (if you want to look at it another way) the different nature of bond investments even when issued by the very same corporation as the stock.

By contrast, the relative stability of Exxon vs BP is an unintended consequence of who won the bidding for the Gulf of Mexico oil rig that blew up in 2010, coupled with hindsight. You selected Exxon based on its past stability, but in 2010 you could have selected BP just as well, days before 50% of your money went up in smoke.

Another thing to consider is that the market itself looks at volatility when pricing assets, together with future earnings. A belief that a set of stocks are "better" on either count translates directly to a belief that current prices are too low. In my experience with investor psychology including mine, this angle is an eye opener because people (including me) don't realize they put very little thought into the current prices.

So yes, get the index which has the additional advantage that if a newcomer completely cannibalizes the business of one of your picks (e.g. Apple and Google feasting on Blackberry, or speculatively Tesla beating Toyota), you'll be there to profit.

I don't think the Dow Jones index is good for anything other than long-term history and round numbers. The S&P and total market indexes are much better.
fsrph
Posts: 1610
Joined: Sun Jul 26, 2009 7:54 pm
Location: Pa.

Re: Sell "stable" stocks for index?

Post by fsrph »

sawhorse wrote:A large chunk of my taxable money is in individual large cap stocks I bought years ago. Major holdings are Archer Daniel Midlands, Exxon, Johnson & Johnson, Procter & Gamble, Sysco, Toyota, Waste Management.

If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund? The portfolio is less volatile than an S&P 500 index fund, and the stocks all give good dividends. Weighted beta is 0.82 and weighted dividends is 2.87%. I'm pretty sure this is less volatile than a Dow Jones index fund too, as the Dow stocks in my portfolio are less volatile than the Dow 30 average.
If you decide to go for the index fund, don't you have significant capital gains in your individual stocks? Perhaps you have losses to balance the gains. If you can convert to the index fund with no or minimal cap gains I'd do it.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Sell "stable" stocks for index?

Post by Grt2bOutdoors »

sawhorse wrote:A large chunk of my taxable money is in individual large cap stocks I bought years ago. Major holdings are Archer Daniel Midlands, Exxon, Johnson & Johnson, Procter & Gamble, Sysco, Toyota, Waste Management.

If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund? The portfolio is less volatile than an S&P 500 index fund, and the stocks all give good dividends. Weighted beta is 0.82 and weighted dividends is 2.87%. I'm pretty sure this is less volatile than a Dow Jones index fund too, as the Dow stocks in my portfolio are less volatile than the Dow 30 average.
Do you have any losses to offset your gains? Will selling those holdings expose you to the ACA tax and additional Medicare tax? I would first calculate the tax impact to all of your income before making any moves.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

No, I don't have any losses to offset gains, so there would be a significant capital gains burden. They have on average doubled since I bought them. Even though they are long term capital gains, the gains are pretty significant. Because I lost my job, our income for 2015 is uncertain.

The worst realistic scenario is that one of these stocks does not survive and recover from the next crash, whenever that happens, and I'll enjoy 3% dividends in the meantime. I can't see more than one not surviving. But you have to weigh the opportunity costs of what I could be investing in instead. Then again, greater potential opportunity cost probably also means investing in less stable stocks that almost certainly don't provide those dividends.

I'm thinking about donating Exxon to charity as I feel that's probably less stable. It's a relatively small part of the portfolio. Second to go would probably be Toyota because of the uncertainty with Japan. I don't see Tesla as a real threat for at least another 5 years. It's the Japanese economy and currency that worries me more. The largest holdings are ADM, JNJ, and PG. I really can't see any of them not surviving the next crash. We're always going to need food, band aids, and shampoo.
Last edited by sawhorse on Fri Apr 03, 2015 5:23 pm, edited 2 times in total.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Sell "stable" stocks for index?

Post by DSInvestor »

Are you reinvesting dividends? You can collect the dividends going forward and use them to invest in index funds.

If you have been reinvesting dividends in the past, each reinvestment increases cost basis. cost basis = purchases + reinvestments.

What tax bracket are you in? LTCG that falls in 15% bracket or lower is taxed at 0% Fed.
Wiki
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

Yes, I've been reinvesting the dividends and I realize that it will reduce the cost basis, but the gains are still pretty good. Our 2015 income is uncertain but will probably be on the border between 25% and 28%.
ogd wrote: I don't think the Dow Jones index is good for anything other than long-term history and round numbers. The S&P and total market indexes are much better.
This is interesting. Why do you say that? I was considering the Dow index because it has better dividends and less volatility, no? But I don't trust some of the stocks in the Dow 30.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Sell "stable" stocks for index?

Post by Leesbro63 »

If you have to pay significant capgains tax, I would keep what you have and add index funds with new money.
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

Leesbro63 wrote:If you have to pay significant capgains tax, I would keep what you have and add index funds with new money.
Because I lost my job and have large medical expenses, there really isn't new money. It's sort of one or the other.

By the way, this money is not our emergency money although we may end up needing it if s$%& hits the fan for more than 6 months.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

In my opinion 28% of your portfolio in individual stocks is too risky, that's not well diversified.

You can shut off any automatic reinvestment of dividends, and use dividends to buy an index fund. This over time will decrease your over-concentration in individual stocks.

What is your marginal tax rate?

As DSInvestor said, you get a reduced rate on long-term capital gains. Your tax bite for selling those stocks may be less than you think.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

Actually it turns out I haven't been reinvesting dividends so those won't be factored into the cost basis.

Our marginal rate for 2014 was 28%. For 2015 it will likely be either 25 or 28%.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

sawhorse wrote:Actually it turns out I haven't been reinvesting dividends so those won't be factored into the cost basis.

Our marginal rate for 2014 was 28%. For 2015 it will likely be either 25 or 28%.
What have you been doing with the dividends?

In those tax brackets, realized long-term capital gains are taxed at a 15% rate.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Caduceus
Posts: 3527
Joined: Mon Sep 17, 2012 1:47 am

Re: Sell "stable" stocks for index?

Post by Caduceus »

I'm not sure I understand the choices. Are you asking if you should sell the individual stocks or the index funds in order to raise funds because of a job loss and medical emergency hitting at the same time?

Or are you saying these things are independent, but it is a low-income year, and you are contemplating the switch from individual stocks to indexes?
dc81584
Posts: 581
Joined: Sat Apr 04, 2015 7:47 am

Re: Sell "stable" stocks for index?

Post by dc81584 »

I'd probably sell and invest in S&P 500 Index fund. Even if you have to pay cap gains, you've still made money.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Sell "stable" stocks for index?

Post by Grt2bOutdoors »

sawhorse wrote:
Leesbro63 wrote:If you have to pay significant capgains tax, I would keep what you have and add index funds with new money.
Because I lost my job and have large medical expenses, there really isn't new money. It's sort of one or the other.

By the way, this money is not our emergency money although we may end up needing it if s$%& hits the fan for more than 6 months.
Sell the individual stock holdings as you need the money. Don't guessestimate which is more stable and which is not, you don't know and neither do I but I expect Exxon to be around well past my lifespan.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Sell "stable" stocks for index?

Post by pkcrafter »

If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund?

If your goal is moderate short term risk, you should not be in individual stocks or an all stock index fund.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Sell "stable" stocks for index?

Post by ogd »

sawhorse wrote:
ogd wrote: I don't think the Dow Jones index is good for anything other than long-term history and round numbers. The S&P and total market indexes are much better.
This is interesting. Why do you say that? I was considering the Dow index because it has better dividends and less volatility, no? But I don't trust some of the stocks in the Dow 30.
The Dow is poorly diversified and uses an antiquated methodology that essentially tries to "fix" a fundamentally faulty structure. It dates from times when the S&P 500 (let alone a broad 3000+ stock index) would have been hard to accomplish technologically. These times are long past.

Higher dividends are a disadvantage in taxable, not an advantage. If you really want them (another discussion), there are dividend-focused indexes that are sound.

I haven't looked closely at volatility, but to the degree that it is less you can expect that this will cost returns. There is no free lunch. Note the "will", because that's what matters. It's possible that at times in the past the Dow was lucky enough to avoid sectors that crashed and thus looks lower volatility, but this has no bearing on the future. Furthermore, there are low-volatility indexes, but like I mentioned I prefer to reduce volatility with much stronger guarantees, like those from the government or the higher priority afforded by corporate bonds even in case of bankruptcy.
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

pkcrafter wrote: If your goal is moderate short term risk, you should not be in individual stocks or an all stock index fund.

Paul
So should I sell them and put them in bond funds? Robert Shiller is pretty pessimistic about bond funds this year.

These are not my emergency funds unless we have a personal financial crisis for more than 6 months.

What do you think about Grt2bOutdoors' suggestion of holding them until we need the money?
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

Caduceus wrote:I'm not sure I understand the choices. Are you asking if you should sell the individual stocks or the index funds in order to raise funds because of a job loss and medical emergency hitting at the same time?

Or are you saying these things are independent, but it is a low-income year, and you are contemplating the switch from individual stocks to indexes?
More the latter but not really. Sorry I wasn't clear.

I've learned through this board and book that index funds are better than individual stocks. This suggests that people who hold individual stocks should liquidate them in order to reap the benefits of index funds. There's an opportunity cost for holding these individual stocks.

The stocks I hold have lower beta and greater dividends than the S&P 500. The largest holdings probably account for a large chunk of index funds anyway, as JNJ, PG, and XOM are in the Dow 30, and ADM is really large too. So is it possible that there is actually less short term risk and comparable return with these stocks, especially considering the nature of their products?

If not, that is, if the short term risk is less with the S&P index or Total Stock fund, would the advantage of switching be worth the commissions and other costs?
kolea
Posts: 1322
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: Sell "stable" stocks for index?

Post by kolea »

I just went through what you are facing - very large portfolio of stocks with lots of unrealized cap gains. I retired ~2 years ago so also had a 401k to deal with. I had made the commitment to adopt the boglehead approach to investing and was determined to convert everything to it, so in 2014 I sold about 50% of my stock and put it in VTI. I knew I was going to face a big cap gains bill, but I would anyway in the future.

The good news is that I am well on the way to a better/easier investment scheme. The bad news is that I managed to overstep the AMT limit and got hit with that. It was bad planning on my part.

In hindsight, the stocks were well diversified by style, size, and sector, so I probably could have actually held onto them. My biggest concern was one of management - it is far easier to sell shares of VTI to generate income than it is to decide which stocks to sell to generate income.

Bottom line - despite the AMT fiasco, I am glad I bit the bullet and got started on indexing. But I think I will take a more measured approach to divesting the remaining stocks I have, probably over 3-5 years.
Kolea (pron. ko-lay-uh). Golden plover.
User avatar
jainn
Posts: 314
Joined: Tue Jun 28, 2011 6:41 pm

Re: Sell "stable" stocks for index?

Post by jainn »

They are only stable until they are not.
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

jainn wrote:They are only stable until they are not.
That's true for indexes too, no? One large reason I'm stressing about this is that these stocks have a lower beta than the Total Stock Index and S&P 500.
User avatar
Peter Foley
Posts: 5533
Joined: Fri Nov 23, 2007 9:34 am
Location: Lake Wobegon

Re: Sell "stable" stocks for index?

Post by Peter Foley »

I too would suggest that you diversify more (either total market or S&P 500). However, you don't have to do this all at once. I would start by reducing my holdings in the more volatile, more cyclical companies. Johnson and Johnson and Proctor and Gamble are probably more stable than the others. (How did each of them do in the last recession?)
stlutz
Posts: 5585
Joined: Fri Jan 02, 2009 12:08 am

Re: Sell "stable" stocks for index?

Post by stlutz »

One option you have is to invest in an ETF focused on more stable stocks. For example:

https://www.ishares.com/us/products/239 ... tility-etf
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Sell "stable" stocks for index?

Post by pkcrafter »

Sawhorse, let's go back to your original post. Maybe I misinterpreted your meaning. If you were referring to the whole portfolio, then you can keep the stocks and moderate risk with bonds or cash in a tax-deferred account.

If you were only referring to the taxable account then, of course, you would need to sell some of the stocks and shift to bonds or cash. Selling individual stocks and replacing with an equity index fund won't help, but maybe you were thinking of a bond fund.

Paul
sawhorse wrote:A large chunk of my taxable money is in individual large cap stocks I bought years ago. Major holdings are Archer Daniel Midlands, Exxon, Johnson & Johnson, Procter & Gamble, Sysco, Toyota, Waste Management.

If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund? The portfolio is less volatile than an S&P 500 index fund, and the stocks all give good dividends. Weighted beta is 0.82 and weighted dividends is 2.87%. I'm pretty sure this is less volatile than a Dow Jones index fund too, as the Dow stocks in my portfolio are less volatile than the Dow 30 average.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

sawhorse has other accounts, an old 457b, an old 403b, Roth IRAs, another taxable account and a traditional IRA. 23% of the portfolio is individual stocks in a taxable account at TDAmeritrade. Search for "lemonade out of lemons". Sorry I can't give a link, I'm posting on a tablet and don't know how to do a link on this device.

There is plenty of tax protected space for bonds if they switch the taxable account to total market stock index funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

ruralavalon wrote:sawhorse has other accounts, an old 457b, an old 403b, Roth IRAs, another taxable account and a traditional IRA. Only 23% of the portfolio is individual stocks in a taxable account at TDAmeritrade. Search for "lemonade out of lemons". Sorry I can't give a link, I'm posting on a tablet and don't know how to do a link on this device.

There is plenty of tax protected space for bonds if they switch the taxable account to total market stock index funds.
That's right. Only 23% of the total portfolio is in individual stocks, but it's a large portion of the taxable money. We don't want to or can't dip into the retirement funds, so I'm sort of treating retirement and non-retirement as different portfolios.

What do you think about selling the stocks slowly, maybe 5% each month? If I shift some of our Capital One interest savings to the Bank of America account, I can get 30 free trades a month with Merrill Edge.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

What purpose do you intend for your investments in the taxable accounts, if not retirement?

Is there some reason you want to sell in stages?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

ruralavalon wrote:What purpose do you intend for your investments in the taxable accounts, if not retirement?
I guess for things before retirement, which for me is decades away. My biggest hope is to get enough of a return on the investments for a house down payment. I don't want to rent for the next 30 years.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

sawhorse wrote:
ruralavalon wrote:What purpose do you intend for your investments in the taxable accounts, if not retirement?
I guess for things before retirement, which for me is decades away. My biggest hope is to get enough of a return on the investments for a house down payment. I don't want to rent for the next 30 years.
Is there a reason you want to sell the stocks in stages?

About how much would you need for a down payment? And about how many years away?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Sell "stable" stocks for index?

Post by sawhorse »

ruralavalon wrote:
sawhorse wrote:
ruralavalon wrote:What purpose do you intend for your investments in the taxable accounts, if not retirement?
I guess for things before retirement, which for me is decades away. My biggest hope is to get enough of a return on the investments for a house down payment. I don't want to rent for the next 30 years.
Is there a reason you want to sell the stocks in stages?

About how much would you need for a down payment? And about how many years away?
I was thinking that selling the stock in stages would be like reverse dollar cost averaging. But maybe it doesn't work that way? And it would also let me pull back if our tax burden would be too heavy.

The houses around here start at $500k, and property taxes are high too. Rents are equally high, and I hate paying so much in rent but until I have enough for a down payment and enough to confidently pay the mortgage every month, I'll have to continue wasting money on rent. With my medical bills, we're only just breaking even. At the moment, our only hope of growing our funds is through investing. At the same time, if the investments turn sour, then we might be renting for decades, and that would be devastating.

Sigh. I guess I want it both ways--high returns, little risk. Doesn't everyone? :|
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Sell "stable" stocks for index?

Post by ruralavalon »

sawhorse wrote: If my goal is to have moderately low short term risk while still realizing some gains, should I sell these stocks and switch to an index fund? . .
. . . . .
The houses around here start at $500k, and property taxes are high too. Rents are equally high, and I hate paying so much in rent but until I have enough for a down payment and enough to confidently pay the mortgage every month, I'll have to continue wasting money on rent. With my medical bills, we're only just breaking even. At the moment, our only hope of growing our funds is through investing. At the same time, if the investments turn sour, then we might be renting for decades, and that would be devastating.

Sigh. I guess I want it both ways--high returns, little risk. Doesn't everyone? :|
There is no magic investment with high returns and little risk. You probably already know this. And having a house down-payment in seven individual stocks is extremely risky.

You have $42k in those individual stocks, link. You need a 138% increase to get $100k for a 20% down payment. To achieve that in a few years would require taking even more risk, a lot more risk.

As practical matter its necessary to save for a down-payment, rather than invest to achieve it. Please see this discussion: "What's the best way to save for a house down-payment?". "Squeezing out a fraction of a percent more by selecting the best safe investment would likely only net you a few hundred bucks more. That would be nice but won't really make a significant difference. . . . Your biggest challenge will be actually saving the money . . . " The thread discusses several different investment alternatives. No reasonably safe investment will get you there.

My suggestion is still that you sell the individual stocks in the TDAmeritrade taxable account, transfer it to Vanguard and invest the money in Vanguard's total market stock type index funds(s) as part of your retirement investing in conjunction with the other accounts. If fortune smiles and the stock index fund(s) take off like a skyrocket, then you can sell some for a house down-payment. If that investment doesn't skyrocket, then you are still well diversified across all of your accounts for your retirement investing.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Post Reply