[Is company stock part of my 3-fund portfolio?]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
PopMegaphone
Posts: 4
Joined: Sun Apr 30, 2017 12:34 am

[Is company stock part of my 3-fund portfolio?]

Post by PopMegaphone » Fri Sep 22, 2017 6:51 pm

[Moved into a stand-alone post from: The Three-Fund Portfolio --admin LadyGeek]

Hi All,

I have a question regarding the 3 fund portfolio and after searching this site I don't see it directly addressed. I'm a big believer in the 3 fund portfolio and I've implemented it except in one area - company stock I've earned via bonuses via the company I work for. Due to my solid financial situation, tax bracket and company stability firmly believe holding on to the stock for a year in order to wait until it is converted to long term capital gains before selling is the optimal decision. After a year, I sell the stock and convert it to the 3 fund portfolio. Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep is separate or a hybrid approach?

Additionally, I have some in the money stock options that I plan to exercise 1 year before expiry (9 years). Same question for the options.

If this has been addressed elsewhere, my apologies. A link would be very helpful!

Thanks in advance!

User avatar
LadyGeek
Site Admin
Posts: 41684
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: [Is company stock part of my 3-fund portfolio?]

Post by LadyGeek » Fri Sep 22, 2017 7:29 pm

PopMegaphone, Welcome! I moved your post into a stand-alone thread so we can focus on your situation directly.

In theory, all of your investments should be considered as a single portfolio. A US stock is part of your US equity allocation.

That being said, is the amount of company stock more than 5% of your total portfolio?* If so, consider diversifying (sell) the stock as your retirement savings may go south if the company tanks.

* 5% is a rule-of-thumb: That's the most you can afford to lose and not risk your retirement plans. See: Variations on Bogleheads® investing (Having a play money account, note 1)
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
Taylor Larimore
Advisory Board
Posts: 26252
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: [Is company stock part of my 3-fund portfolio?]

Post by Taylor Larimore » Fri Sep 22, 2017 7:34 pm

PopMegaphone:

Welcome to the Bogleheads forum!

My response in blue:

I'm a big believer in the 3 fund portfolio. So am I.

(I) firmly believe holding on to the stock for a year in order to wait until it is converted long term capital gains before selling is the optimal decision. I agree that this is usually the optimal decision.

After a year I sell it and convert it to The Three-Fund Portfolio. Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep it separate or a hybrid approach?

You should have a long-term, overall, asset-allocation plan. Therefore, simply allocate the proceeds from your stock sale into whichever three fund(s) is less than your asset-allocation plan.


Best wishes.
Taylor
Last edited by Taylor Larimore on Fri Sep 22, 2017 7:40 pm, edited 1 time in total.
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
Duckie
Posts: 5142
Joined: Thu Mar 08, 2007 2:55 pm

Re: [Is company stock part of my 3-fund portfolio?]

Post by Duckie » Fri Sep 22, 2017 7:39 pm

PopMegaphone wrote:Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep is separate or a hybrid approach?
It's a US stock. While holding it include it in your US equity AA.

PopMegaphone
Posts: 4
Joined: Sun Apr 30, 2017 12:34 am

Re: [Is company stock part of my 3-fund portfolio?]

Post by PopMegaphone » Fri Sep 22, 2017 7:42 pm

Thank you for the welcomes!
LadyGeek wrote:
Fri Sep 22, 2017 7:29 pm
PopMegaphone, Welcome! I moved your post into a stand-alone thread so we can focus on your situation directly.

In theory, all of your investments should be considered as a single portfolio. A US stock is part of your US equity allocation.

That being said, is the amount of company stock more than 5% of your total portfolio?* If so, consider diversifying (sell) the stock as your retirement savings may go south if the company tanks.

* 5% is a rule-of-thumb: That's the most you can afford to lose and not risk your retirement plans. See: Variations on Bogleheads® investing (Having a play money account, note 1)
This is a good point. Currently the Stock+Options is about 10% of my portfolio. About 80% of the stock exposure is older options that is LT cap gains. It might be a good idea to liquidate some of those options despite not holding on to it for an optimal amount time.

Taylor Larimore wrote:
Fri Sep 22, 2017 7:34 pm


You should have a long-term, overall, asset-allocation plan. Therefore, simply allocate the proceeds from your stock sale into whichever three fund(s) is less than your asset-allocation plan.

My apologies, I wasn't clear. My question is how to add it to my allocation before I sell it.
Last edited by PopMegaphone on Fri Sep 22, 2017 7:53 pm, edited 1 time in total.

PopMegaphone
Posts: 4
Joined: Sun Apr 30, 2017 12:34 am

Re: [Is company stock part of my 3-fund portfolio?]

Post by PopMegaphone » Fri Sep 22, 2017 7:51 pm

Duckie wrote:
Fri Sep 22, 2017 7:39 pm
PopMegaphone wrote:Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep is separate or a hybrid approach?
It's a US stock. While holding it include it in your US equity AA.
This is my current approach but it doesn't feel completely right to me. I feel like I'm short changing my US equity allocation do to holding a (relatively) risky single US stock. At best, this stock is a poor mans US total index fund.

User avatar
Taylor Larimore
Advisory Board
Posts: 26252
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: [Is company stock part of my 3-fund portfolio?]

Post by Taylor Larimore » Fri Sep 22, 2017 7:56 pm

My apologies, I wasn't clear. My question is how to add it to my allocation before I sell it.
PopMegaphone:

Duckie (as he always does) gave you a good answer. Don't "over-think" your investments. No one even knows what the best investment allocation will turn-out to be.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

alex_686
Posts: 2626
Joined: Mon Feb 09, 2015 2:39 pm

Re: [Is company stock part of my 3-fund portfolio?]

Post by alex_686 » Fri Sep 22, 2017 8:01 pm

Duckie wrote:
Fri Sep 22, 2017 7:39 pm
PopMegaphone wrote:Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep is separate or a hybrid approach?
It's a US stock. While holding it include it in your US equity AA.
Yes, but it is not a domestic stock index. It is not one of the 3 funds. It is an individual stock. Because of the extra risk I would give it a modest 20% discount for AA. Maybe 40% if your company stock does not act like a domestic stock fund. i.e., a very high or low Beta.

User avatar
LadyGeek
Site Admin
Posts: 41684
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: [Is company stock part of my 3-fund portfolio?]

Post by LadyGeek » Fri Sep 22, 2017 8:17 pm

PopMegaphone wrote:
Fri Sep 22, 2017 7:51 pm
Duckie wrote:
Fri Sep 22, 2017 7:39 pm
PopMegaphone wrote:Question - should I include this US stock in the US equity portion of the 3 fund portfolio, keep is separate or a hybrid approach?
It's a US stock. While holding it include it in your US equity AA.
This is my current approach but it doesn't feel completely right to me. I feel like I'm short changing my US equity allocation do to holding a (relatively) risky single US stock. At best, this stock is a poor mans US total index fund.
Look at it from another perspective.

US equity funds in a 3-fund portfolio are diversified, meaning they track the S&P 500® index (tracks the stock of 500 companies) or perhaps the Wilshire 5000 Total Market Index (tracks the stock of 5,000 companies). When a few stocks tank, the indexes don't move much. That's how diversification works.

So, 90% of your equity (stock) allocation is comprised of thousands of company stocks. A single company stock for the remaining 10%. When that company stock moves, it takes your whole portfolio with it. 10% doesn't seem all that much right now, but the miracle of compounding interest will magnify that effect in the long-term. That's why Jack Bogle says 5% maximum (rule of thumb).

FYI - The Dow Jones Industrial Average is followed as one of the major US equity indexes. What's in the index? 30 company stocks. That's all, just 30. See: The Changing DJIA Why do investors follow it? Because it can be tracked back to 1896, but I digress.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
BeBH65
Posts: 862
Joined: Sat Jul 04, 2015 7:28 am

Re: [Is company stock part of my 3-fund portfolio?]

Post by BeBH65 » Sat Sep 23, 2017 12:31 am

Hello popmegphone,

It is best to look at all your investments as one.
Hence the investments in your company stock is part of your portfolio next to the funds that you hold.
You can then calculate the ratios: bonds, domestic equity and international equity and determine if it matches with your desired asset allocation.

Note that Investing in individual stock entails specific risks.
Holding stock of the company where you also work has extra risk. If the companies performs less well you might loose your salary and your investments at the same time.

Stock options are generally not included in the investment portfolio until they are really converted and you are able to trade them.

To give you a comprehensive advise we need some more information of you. Please consider updating the opening post of this thread according to the practices mentioned in Asking_portfolio_questions.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Chip
Posts: 1658
Joined: Wed Feb 21, 2007 4:57 am

Re: [Is company stock part of my 3-fund portfolio?]

Post by Chip » Sat Sep 23, 2017 5:48 am

PopMegaphone wrote:
Fri Sep 22, 2017 7:42 pm
This is a good point. Currently the Stock+Options is about 10% of my portfolio. About 80% of the stock exposure is older options that is LT cap gains. It might be a good idea to liquidate some of those options despite not holding on to it for an optimal amount time.
Welcome! You're getting good answers from others but I want to focus on the above statement.

If you have non-qualified stock options (NQSOs), when you exercise them the difference between the exercise price and the strike price is taxed as salary income, NOT LT capital gains.

With NQSOs, the only way to have LT capital gains is if you previously exercised them (AND paid the tax), receiving stock, then held the stock for over a year. And the stock appreciated while you've held it.

Incentive stock options (ISOs) have a different tax treatment but I don't have experience with those.

So be sure you understand what you have and the tax consequences of making changes before you make them.

Post Reply