AAPL: Too much of a good thing?

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rai
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AAPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 9:36 am

I'm at odds with AAPL (in my taxable account)

I know that individual stocks are anathama in this community, and I agree that all things being equal that I'd rather have all index funds. I like the way you can treat index in taxable account such as TLH and like that you are not single stock exposed etc. all the usual good stuff.

I have a sizable position of AAPL from 8-10 years ago. It has a favorable PE, has $250B cash equivilants that may be in line for repatriation, has growing dividend and stock buyback, has a wide moat etc..

My question/problem is I'm in the highest tax rate, LT will be 30% tax on gains including fed, Medicare and state tax. 75% of my Apple would LT gains.

IOW if I sold $142K of APPL in one fell swoop I'd be paying $42K in taxes.

Paying taxes to me is the same as loss in a position. So what your sage advice?

I don't want to say exactly what I hold but AAPL is 15% of my total stock position.

I do hold some shares that are less than 100% LT gain which obviously I will sell first but some shared are at 700% gain which would take a 25% haircut if sold and paid taxes.
Last edited by rai on Wed Feb 01, 2017 10:21 am, edited 1 time in total.
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vital15
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Re: APPL: Too much of a good thing?

Post by vital15 » Wed Feb 01, 2017 9:48 am

Congratulations on the nice return. If you think it is fully priced now and don't want to hold there is not much you can do. I'd recommend you consider giving some of the appreciated shares to a qualified charity, which allows you to take a deduction for the full market value.

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TheTimeLord
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Re: APPL: Too much of a good thing?

Post by TheTimeLord » Wed Feb 01, 2017 10:07 am

If you want to lighten up on your position in Apple possibly do it by contributing shares to charity instead of donating $$$ or setting up a DAF.
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obafgkm
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Re: APPL: Too much of a good thing?

Post by obafgkm » Wed Feb 01, 2017 10:17 am

rai wrote:I'm at odds with APPL (in my taxable account)
What is "APPL"?

What happens when you speak in ticker language.

rai
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Re: APPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 10:20 am

I'm not a tax wizard so I don't know but I have tens of thousands in ST gains from option trades which I could offset by charitable gifts but I'm not sure what the net result would be or if charatable gifts are disallowed in the highest tax bracket and/or if AMT would step in if I have too many deductions.

my marginal tax rate (and ST cap gains tax rate) is over 45% after Medicare and state taxes
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

rai
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Re: APPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 10:22 am

obafgkm wrote:
rai wrote:I'm at odds with APPL (in my taxable account)
What is "APPL"?

What happens when you speak in ticker language.
Sorry AAPL (typo)

Apple stock
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

rai
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Re: APPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 10:23 am

TheTimeLord wrote:If you want to lighten up on your position in Apple possibly do it by contributing shares to charity instead of donating $$$ or setting up a DAF.
What's DAF
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

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TheTimeLord
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Re: APPL: Too much of a good thing?

Post by TheTimeLord » Wed Feb 01, 2017 10:27 am

rai wrote:
TheTimeLord wrote:If you want to lighten up on your position in Apple possibly do it by contributing shares to charity instead of donating $$$ or setting up a DAF.
What's DAF
Donor Advised Fund.

DEFINITION of 'Donor Advised Fund'
A private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual.

Read more: Donor Advised Fund Definition | Investopedia http://www.investopedia.com/terms/d/don ... z4XRomC9fp
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rai
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Re: AAPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 10:29 am

Not wanting to sound callous, but I don't care to give to charity unless I'd come out ahead of what I'd pay on taxes IOW if I'm paying more to donate I'd just as well rather pay taxes.

My view is I'm still saving, I pay a lot in taxes already so I'm looking to retire or meet my number first before I turn to donations. If I was set and no longer needed to save I'll give more to charity with my excess money.
Last edited by rai on Wed Feb 01, 2017 10:32 am, edited 1 time in total.
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CyclingDuo
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Re: APPL: Too much of a good thing?

Post by CyclingDuo » Wed Feb 01, 2017 10:31 am

rai wrote:I'm at odds with APPL (in my taxable account)

I know that individual stocks are anathama in this community, and I agree that all things being equal that I'd rather have all index funds. I like the way you can treat index in taxable account such as TLH and like that you are not single stock exposed etc. all the usual good stuff.

I have a sizable position of APPL from 8-10 years ago. It has a favorable PE, has $250B cash equivilants that may be in line for repatriation, has growing dividend and stock buyback, has a wide moat etc..

My question/problem is I'm in the highest tax rate, LT will be 30% tax on gains including fed, Medicare and state tax. 75% of my Apple would LT gains.

IOW if I sold $142K of APPL in one fell swoop I'd be paying $42K in taxes.

Paying taxes to me is the same as loss in a position. So what your sage advice?

I don't want to say exactly what I hold but AAPL is 15% of my total stock position.

I do hold some shares that are less than 100% LT gain which obviously I will sell first but some shared are at 700% gain which would take a 25% haircut if sold and paid taxes.
I hear you.

Yes, individual stocks should not be an anathema for BH investors as many do indeed own some - be it through company stock, in various accounts via prior investing strategy, inherited, or even keeping a portion of one's overall portfolio in individual stocks. In both your case, and my case - the buy and hold strategy for LT gains in Apple is sage investing as it has provided a really wonderful share price return, as well as the dividends.

Your position is still less than 20% of your portfolio which again, is sage investing strategy by not letting a position in a diverse portfolio become more than 20%. A lot of simple portfolios for individual stock investing are built on the 5 - 10 stock portfolio suggestions in diverse sectors. So in a 5 stock diverse portfolio, each stock would represent 20%. Bump up to 10 stocks, and each stock should represent 10%. So you are within the normal bounds of diversity by your position being at 15% of your total stock position. What does that percentage ring out in terms of total portfolio (including stocks, bonds, short term)? Is it lower than 15%?

As of last night quarterly earning's report, and the subsequent jump in share price today, Apple is now also our largest individual holding (surpassed Berkshire Hathaway this morning with the share price leap). Our position is 6.x% of our overall portfolio as we hold it in taxable, as well as retirement accounts. And of course - it is in everyone's stock mutual fund(s) as well. :beer

If it has grown to be too large of a position for your personal investing strategy, you could take some profits - pay the taxes - and move the proceeds into other portions of your portfolio to get your AA balance back in equilibrium. Do you have any investments at a loss in your taxable that you could use to offset the gains?

You could also gift up to - what is it now, $14K per year? - to one of your children. A few years of doing that would trim your position. Of course, your cost basis will transfer with the gift and your children will then be stuck with the cap gains of your cost basis when they sell - as opposed to them inheriting it at the cost basis of when you pass. But, it is a way to trim your position now without selling any shares and pass it on to your heirs. :D

Outside of concerns of risk in single stock percentages of your portfolio and taking comfort in more diversity through index funds, in terms of Apple as an investment going forward - has anything changed in your buy and hold strategy with this particular stock? If they continue to grow earnings, continue to have no debt, continue to have a well balanced business model, continue to have the cash flow that they do and the piles of cash that they have - do you think it will underperform the market going forward over a longer time horizon?

In the end, it comes down to your overall portfolio strategy, comfort level, and desired AA. The tax consequences of returns on your investment are part of investing, and are certainly more desirable than losses on your investments. I don't think anyone would fault you if you took some profits to rebalance, took all the profits to move into index funds, or just left it alone.

We are currently slowly building up the index funds/ETF's to get a better over all AA balance, lower fees, and simplify things. However, that doesn't mean all individual stocks are going to be suddenly sold - much for the same reasons you mention being that the tax consequences of selling are quite a hit. My evaluation of Apple as an investment doesn't have us selling our shares at this point with their business model, anticipated earnings through upcoming product cycles, and their cash flow. Yet, as you know from the past 8-10 years, the share price is going to fluctuate enough to have you question things along the way.
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TheTimeLord
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Re: AAPL: Too much of a good thing?

Post by TheTimeLord » Wed Feb 01, 2017 10:36 am

rai wrote:Not wanting to sound callous, but I don't care to give to charity unless I'd come out ahead of what I'd pay on taxes IOW if I'm paying more to donate I'd just as well rather pay taxes.

My view is I'm still saving, I pay a lot in taxes already so I'm looking to retire or meet my number first before I turn to donations. If I was set and no longer needed to save I'll give more to charity with my excess money.
Donor Advised Funds Have a Tremendous Tax Benefit
There are two main benefits of donating to a donor advised fund:

You are able to donate appreciated assets without realizing capital gains on these assets. Because earnings within the donor advised fund are tax-free, this will eliminate your future capital gains taxes for disposing of these assets.

You will also receive a full charitable deduction for the value of the assets you put into the fund in the year of contribution. By donating to a donor advised fund, you are effectively front-loading a “ready reserve” of charitable dollars, which can be invested for potential future growth. That reserve can be used over time to support any 501(c)(3) charitable organization.


Read more: What Are the Benefits of a Donor Advised Fund? | Investopedia http://www.investopedia.com/advisor-net ... z4XRqmRJRB
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aristotelian
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Re: AAPL: Too much of a good thing?

Post by aristotelian » Wed Feb 01, 2017 10:42 am

This is a good problem to have. Having to pay taxes on gains is not at all a loss. It is what you do as a citizen when you make money, either from a job or an investment. You can minimize taxes, but you can never get away from them. I would not let taxes get in the way of a rational financial decision.

The only issue I see is whether selling the whole lot now might cause enough gains to put you in a higher tax bracket. If that is the case, then you should sell incrementally.

Otherwise, if you feel AAPL is overvalued or just overweighted in your portfolio, you might as well sell. You will either owe taxes now or you will owe more taxes in the future. If the thought of paying taxes on investment gains stresses you out, you may want to consider tax free bonds in the future.

Elbowman
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Re: AAPL: Too much of a good thing?

Post by Elbowman » Wed Feb 01, 2017 10:58 am

How far are you from retirement? If it is relatively soon (say 5-10 years), you could gamble on Apple's stock staying strong until you reach your retirement tax bracket. If it is a ways away (say 20-30 years), I feel there is a much higher chance of a significant change disrupting Apple's dominance.

I like the phrase "the only thing worse than paying capital gains tax is not having capital gains to pay taxes on."

AllenSmith
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Re: AAPL: Too much of a good thing?

Post by AllenSmith » Wed Feb 01, 2017 11:05 am

Congrats - you killed it on that investment. Selling is fine if you want to lighten up...you're always going to have to pay the tax (eventually)

rai
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Re: AAPL: Too much of a good thing?

Post by rai » Wed Feb 01, 2017 11:12 am

It is impossible for me to be in a higher tax bracket than current. I pay the Medicare 3.8% investment tax as well as top Fed and top State tax rate.

I am 10-11 years from retirement and will have a doughnut hole in my tax rate for about 8-9 years before SS tax or RMD distrubutions and I will be in whatever tax rate I can create through my taxable account and ROTH roll over.
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inbox788
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Re: AAPL: Too much of a good thing?

Post by inbox788 » Wed Feb 01, 2017 11:55 am

rai wrote:I have a sizable position of AAPL from 8-10 years ago. ...
...I don't want to say exactly what I hold but AAPL is 15% of my total stock position.
The issue isn't mainly taxes. It's only one of three. But let's look at that. You don't say how old you are, so I'll assume middle age. What is your marginal tax rate now? What was it in the past when you were younger? What do expect it to be when you retire? And will there be a gap if you retire early or are not making income where your marginal tax rate will drop and you can plan to tax efficiently sell off some assets? If taxation rate remains constant, tax isn't an issue. You'll either pay the tax now or pay it later.

Second, is performance, and today is a bad day to be looking at that. Given Apples past performance and today, you're conditioned to expect higher returns. This makes you complacent and accept a larger risk on a single stock, so when the stock drops 6% instead or rising 6%, you may have actually increased your holdings at risk. Whatever the single stock, the future expectation is that it will make the same risk adjusted market returns, so you got lucky and are just rolling the dice. Eventually, the luck will catch up to most of us.

Lastly, to manage the risk, diversification is key. It is important to know what else you hold. If you're fully diversified with the rest of the 85% of holdings, then 15% (plus whatever gains you got today) limit your full exposure. If the rest are similar 10% stakes in 8 other single stocks, then you're taking on more risk and potentially unacceptable risk. If the other holdings are in the same sector, say finance or tech, just look at the sector funds.

https://www.google.com/finance?q=xlf (37 in 2007, 23 today)
https://www.google.com/finance?q=xlk (64 in 2000, 50 today)

If you risk is this concentrated, then you need to diversify immediately. If the rest of your concentrated risk is broadly diversified, then you have a little less to worry about, and on one point, might actually have less Apple exposure than the fully diversified portfolio that holds 3% Apple.

Figure out your tolerance for this single stock risk that could potentially go down 50% in a severe bear market or go bankrupt, and take corrective action. You don't need to sell it all off, but enough to sleep well at night. Imagine yourself retired and holding this much stock in a single stock with associated risk.

As far as donating the stock, it might not be time for you yet, but keep it in mind. Right now, if you're taxed 50%, the tax benefits of donating now are greater. If you wait till later, your tax benefit might only be 25%. If you plan accordingly, you can donate more to the charity and save the same amount than if you tried to save now and donate later. This is most dramatically seen when you compare this year with high tax rate and if next year is a low tax rate year. The order you make your donation matters, and if you extend this idea with advanced planning, you can be far more efficient about your giving, in some cases, giving more and keeping more (basically splitting Uncle Sams contribution between you and the charity). You can donate a lifetime of giving into a DAF now, and when you retire stop contributing, and just distribute what's in the DAF. It takes a while to get your head around this idea, but it's a win/win.

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