How much is too much of one stock in portfolio?

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LC Mike
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How much is too much of one stock in portfolio?

Post by LC Mike » Thu Mar 14, 2019 11:10 pm

I have a 7 figure portfolio saved in preparation for retirement. I am currently married and 52 years of age. My wife and I are well compensated in our current jobs and choose tax deferred options as much as possible due to our current tax bracket. Here is our dilemma. One of us receives stock grants in an MLP that pays a very nice dividend of over 6%. We have accumulated enough of this stock over the years (it vests over several years) that it comprises about 30% of our portfolio. We try to avoid selling the stock due to our tax bracket and the tax reporting complications in selling the MLP stock and would like to retain it for as long as possible for both the step up basis for our heirs and the significant dividend stream that it will produce for us as retirement income when we retire in a few years. However, I do not like carrying one stock as 30% of my retirement portfolio. I expect that with our lump sum pension, eventually this stock will represent about 20% of our portfolio. What are your thoughts? Should I sell off regardless of the tax hit, wait until our income drops when we retire and then sell to reduce exposure, or keep it for the income stream that it produces for the long term and let our heirs divest when they inherit in the future and can sell with the step up basis?

nordsteve
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Re: How much is too much of one stock in portfolio?

Post by nordsteve » Thu Mar 14, 2019 11:50 pm

How much unrealized gains do you have?

Decision on new shares is different from those with unrealized gains.

jbranx
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Re: How much is too much of one stock in portfolio?

Post by jbranx » Thu Mar 14, 2019 11:52 pm

The view of this board will likely be that one individual stock is one too many and 8,125 are not quite enough. That's how many stocks are in Vanguard's Total World mutual fund and ETF. I'm kidding, but if you or your spouse have worked a long time at the MLP you may know far better than stock researchers how the firm will perform.

Six percent is a good return, but is that payout sustainable? Is the MLP in an industry where it is not subject to the travails of say, the Kinder-Morgan MLP that had to restructure? MLP's have to pay out a substantial portion of earnings, so debt issuance or more stock issuance and dilution are frequent moves. The payouts are not always tax efficient and IRS regs will tax any significant payouts in IRA's. It takes a tax genius to understand the tax implications of some MLPs; others are pretty simple creatures that a TurboTax package can handle.

I've owned MLP's and experienced both the highs and lows of owning them. Sold the last ones last year, filing the last K-1 as soon as it comes at the end of March, and I'll eat dog food rather than own another one. That's the attitude of a lot of folks, which explains why the asset class goes in and out of favor. Holders have historically been yield seekers, institutions don't generally hold them, and some brokers put restrictions on whether retail investors can purchase them and funds that concentrate on them. Analysts are hit and miss on their recommendations of the MLP's. Research the record of Morningstar's 5-Star blessing of Spectra Energy, just as one example of how bright people can totally miss the big picture.

Options traders can devise strategies like collars to hedge large individual stock holdings, but I have no idea how sound that would be for an MLP that might have limited options, if any. So, yes, your percentages are too high, even 20%, knowing the little you have spelled out so far. But, again, you may know more than those outside the firm.

I'd research and calculate the tax impacts and seek the advice of a good CPA and/or fee-only financial planner not affiliated with a brokerage firm and fully understand the complications and possible best strategies going forward. Good luck on the decision.
Last edited by jbranx on Fri Mar 15, 2019 12:17 am, edited 2 times in total.

HomeStretch
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Re: How much is too much of one stock in portfolio?

Post by HomeStretch » Fri Mar 15, 2019 12:14 am

I would not be comfortable holding 30% of my portfolio in one stock. Especially the stock of my employer. If the one stock/30% of my portfolio declined significantly in value, at age 50+ it would affect my planned retirement date. I would sell enough stock to reduce my holding to no more than 10%, possibly over a couple years to spread the tax hit.

NMBob
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Re: How much is too much of one stock in portfolio?

Post by NMBob » Fri Mar 15, 2019 12:27 am

Remember, which I think you hinted at with your tax deferred comment, but in case you didn't.........

Many MLPS are paying you return of capital or principal payments mostly , in the common monthly distribution. See your year end tax statement. Those principal payments reduce the original cost basis lower than your original purchase cost. I don't know if the adjusted cost basis is on your K-1 form so you can estimate your capital gains tax for a potential sale.

https://www.investingdaily.com/13535/ml ... ax-season/

DonIce
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Re: How much is too much of one stock in portfolio?

Post by DonIce » Fri Mar 15, 2019 1:41 am

I definitely wouldn't hold 30% of my portfolio in one stock. Especially if it's your employer (you are already overexposed to your employer's success or failure even if you have none of their stock).

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vineviz
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Re: How much is too much of one stock in portfolio?

Post by vineviz » Fri Mar 15, 2019 2:07 am

LC Mike wrote:
Thu Mar 14, 2019 11:10 pm
Should I sell off regardless of the tax hit, wait until our income drops when we retire and then sell to reduce exposure, or keep it for the income stream that it produces for the long term and let our heirs divest when they inherit in the future and can sell with the step up basis?
Sell regardless of the tax hit.

A single energy MLP should never be more than 15% of your portfolio, and it should be much less if it’s also your employer.

Find a way to get it down to 10% by, say, yesterday.

Work with your tax advisor to minimize taxes, obviously (by donating the lowest cost shares to charity instead of donating cash, for instance) but don’t wait.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Valuethinker
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Re: How much is too much of one stock in portfolio?

Post by Valuethinker » Fri Mar 15, 2019 7:54 am

vineviz wrote:
Fri Mar 15, 2019 2:07 am
LC Mike wrote:
Thu Mar 14, 2019 11:10 pm
Should I sell off regardless of the tax hit, wait until our income drops when we retire and then sell to reduce exposure, or keep it for the income stream that it produces for the long term and let our heirs divest when they inherit in the future and can sell with the step up basis?
Sell regardless of the tax hit.

A single energy MLP should never be more than 15% of your portfolio, and it should be much less if it’s also your employer.

Find a way to get it down to 10% by, say, yesterday.

Work with your tax advisor to minimize taxes, obviously (by donating the lowest cost shares to charity instead of donating cash, for instance) but don’t wait.
I would tend to agree with this advice. Energy is just too volatile a sector - even on the energy transport stocks.

10% in a single stock seems a reasonable maximum.

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Fieldsy1024
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Re: How much is too much of one stock in portfolio?

Post by Fieldsy1024 » Fri Mar 15, 2019 1:44 pm

I was at 55% on one stock two weeks ago till I went 85% S&P/15% single stock.

megabad
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Re: How much is too much of one stock in portfolio?

Post by megabad » Fri Mar 15, 2019 4:33 pm

LC Mike wrote:
Thu Mar 14, 2019 11:10 pm
I have a 7 figure portfolio saved in preparation for retirement. I am currently married and 52 years of age. My wife and I are well compensated in our current jobs and choose tax deferred options as much as possible due to our current tax bracket. Here is our dilemma. One of us receives stock grants in an MLP that pays a very nice dividend of over 6%. We have accumulated enough of this stock over the years (it vests over several years) that it comprises about 30% of our portfolio. We try to avoid selling the stock due to our tax bracket and the tax reporting complications in selling the MLP stock and would like to retain it for as long as possible for both the step up basis for our heirs and the significant dividend stream that it will produce for us as retirement income when we retire in a few years. However, I do not like carrying one stock as 30% of my retirement portfolio. I expect that with our lump sum pension, eventually this stock will represent about 20% of our portfolio. What are your thoughts? Should I sell off regardless of the tax hit, wait until our income drops when we retire and then sell to reduce exposure, or keep it for the income stream that it produces for the long term and let our heirs divest when they inherit in the future and can sell with the step up basis?
I would say it depends on how you think of the money. If you can envision that 30% as play money and you would not be upset if you lost it all, than I think it is fine to hold the MLP shares. If you are counting on it for retirement, I would without question sell anything with zero or near zero cost basis as soon as it vests and hits long term status (if applicable). If you did this, even if you did not sell the appreciated shares, you would still see a rapidly declining share of your portfolio in the MLP over time. Honestly, if these are long term capital gains and this thing is continuously spewing out 6% dividends, it is already pretty tax inefficient to hold on to it, so I might just sell the whole of it and be done with it.

123
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Re: How much is too much of one stock in portfolio?

Post by 123 » Fri Mar 15, 2019 4:38 pm

Have you investigated whether there is any market to sell the MLP shares and what the current prices are?

When your head has been in the clouds for awhile about how great an investment seems to be sometimes it's a different reality when you try to sell.
The closest helping hand is at the end of your own arm.

onourway
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Re: How much is too much of one stock in portfolio?

Post by onourway » Fri Mar 15, 2019 4:45 pm

For me ‘too much’ would be if that one stock comprised a large enough portion of your portfolio that your goals would be considerably compromised if that stock went to zero. If the money is just icing on the cake of an overly large portfolio, let it ride. If you need that 30% of your portfolio though to get through your pending retirement, I’d diversify ASAP.

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nisiprius
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Re: How much is too much of one stock in portfolio?

Post by nisiprius » Fri Mar 15, 2019 8:27 pm

If you were a mutual fund, and you had more than 5% of your portfolio invested in one stock, you would have to earn investors that you were not considered to be a "diversified fund."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

MotoTrojan
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Re: How much is too much of one stock in portfolio?

Post by MotoTrojan » Fri Mar 15, 2019 8:37 pm

You aren’t reinvesting dividends, right?

NibbanaBanana
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Re: How much is too much of one stock in portfolio?

Post by NibbanaBanana » Fri Mar 15, 2019 9:03 pm

30%? I did that. Twice. Here's how it went.

Had 30% in MRK stock in the glory days of 2000. By the time the vioxx scandel had wrung out five years or so later, it was more like 3%. Solved that problem.

Had 30% in a handful of high flying financials in 2007. Don't have to tell you how that turned out. Problem solved.

I would sell first thing Monday. Good luck.

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rob
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Re: How much is too much of one stock in portfolio?

Post by rob » Fri Mar 15, 2019 9:10 pm

Don't let the tax tail wag the dog...
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

UpperNwGuy
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Re: How much is too much of one stock in portfolio?

Post by UpperNwGuy » Fri Mar 15, 2019 9:29 pm

More than market weight would be too much for me.

cashheavy18
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Re: How much is too much of one stock in portfolio?

Post by cashheavy18 » Fri Mar 15, 2019 9:38 pm

Do you and your spouse have a strategy for charitable giving?

Moving some % of this stock to a DAF or straight out donating shares to a charity will solve your exposure and tax problems (no capital gains hit + tax deduction) & more importantly provide funds to a cause you support.

We have been using this strategy for 5+ years and it's been wonderful way to reduce our exposure in a particular stock and give to charities that are important to us.

Good luck!

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