Need help diversifying -- 17.8% of investments are in a single stock

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blondebruin
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Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Mar 12, 2018 4:18 pm

I'm new to focusing on investing/retirement planning, and am aiming to replicate the asset allocation of a target date fund (haven't decided Vanguard vs. Fidelity) across my investment accounts. The hitch is that I already have a significant percentage of my investments in a Schwab portfolio that has minimal diversification: 31% of the value of all my investments is in that portfolio, and 57% of the Schwab portfolio is a single company (BIIB), such that 17.8% of my total investments are in BIIB.

I'm going for approximately 60% of my investments in domestic equity, and it freaks me out that if I keep the Schwab account as is, half of my total domestic equity won't be diversified. I'm not sure what is the best way to work on fixing this, and would appreciate any thoughts or suggestions. The simplest move seems to be to liquidate my Schwab account and move the money into indexed funds, but I'm not sure if I'm missing any hidden pitfalls with that approach. I know it's going to trigger capital gains tax, and I was considering using the cash to fund our IRAs (we're over the contribution limits so it would be an after-tax contribution that I'd backdoor convert to a Roth). Am I missing anything?

tesuzuki2002
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by tesuzuki2002 » Mon Mar 12, 2018 4:27 pm

blondebruin wrote:
Mon Mar 12, 2018 4:18 pm
I'm new to focusing on investing/retirement planning, and am aiming to replicate the asset allocation of a target date fund (haven't decided Vanguard vs. Fidelity) across my investment accounts. The hitch is that I already have a significant percentage of my investments in a Schwab portfolio that has minimal diversification: 31% of the value of all my investments is in that portfolio, and 57% of the Schwab portfolio is a single company (BIIB), such that 17.8% of my total investments are in BIIB.

I'm going for approximately 60% of my investments in domestic equity, and it freaks me out that if I keep the Schwab account as is, half of my total domestic equity won't be diversified. I'm not sure what is the best way to work on fixing this, and would appreciate any thoughts or suggestions. The simplest move seems to be to liquidate my Schwab account and move the money into indexed funds, but I'm not sure if I'm missing any hidden pitfalls with that approach. I know it's going to trigger capital gains tax, and I was considering using the cash to fund our IRAs (we're over the contribution limits so it would be an after-tax contribution that I'd backdoor convert to a Roth). Am I missing anything?
I would ask myself how much cap gains would I incur? Thousands or tens of thousands? Just a ref point.

I have a couple large holdings 8-10% in a single company. I continue to sell them off periodically because they continue to perform well.

Diversification is what you want it to be. If you have good cash flow you can take on that risk. But we’re always improving. Good luck. I think you’ve thought it thru. Time to carry it to the finish line!

MotoTrojan
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by MotoTrojan » Mon Mar 12, 2018 10:21 pm

Side-note, but do some research on the three-fund portfolio and asset allocation, rather than just blindly following a Target Retirement fund made for the masses but not your situation/personality.

Also research whether you actually need foreign bonds, or can simplify to 3-funds (vs. Vanguards 4-fund Target funds).

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Sandtrap
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by Sandtrap » Mon Mar 12, 2018 10:34 pm

Welcome.
I don't understand why you are trying to replicate a target date fund instead of getting a target date fund if that is what fits your needs.
Perhaps it might do well to step back and take a more comprehensive look at things and set up a step by step path toward long term financial goals.
As mentioned, you may incur some substantial capital gains so proceed carefully to best tax advantage. I had a recent experience converting MIL's portfolio with nearly 100% of individual stocks to a "Bogle 3 fund" and it was tricky.

First: If you care to, how about a big picture evaluation and some input within a greater context.
Use this format.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

And perhaps some review:
GETTING STARTED
https://www.bogleheads.org/wiki/Getting_started
Bogle 3 Fund Portfolio Basics and Beyond
https://www.bogleheads.org/wiki/Three- ... _portfolio
You can replicate this in Schwab with Schwab low cost index funds.

Have you done this?
Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement

I hope this is helpful.
mahalo
j :D
Wiki Bogleheads Wiki: Everything You Need to Know

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mhadden1
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by mhadden1 » Tue Mar 13, 2018 1:27 am

Since the capital gains rate is 0% for the 12% bracket, it could ease your single stock exit pain, if you could get there. Maybe heroically increase your deductible 401k contributions if you don't already? And your MFJ partner's too, if applicable? Over a period of years perhaps?

Obviously if you are way up in the 22% bracket this doesn't help. Going forward you might have some capital losses along the way to offset the gains. Hope not I guess.

I think diversifying is the right thing to do - my only single stock is some company stock I can't easily sell. But, if I liked the stock I would not feel bad if some remainder comprised 5-10% of portfolio. Don't tell the other BHs, though. :happy
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

inbox788
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by inbox788 » Tue Mar 13, 2018 3:06 am

Don't worry, it's a good problem to have. What tax bracket are you in? How long do you expect to be in that bracket? Is there a low tax bracket year or period on the horizon? Retirement, sabbatical, job change, etc.

How long have you been accumulating BIIB? Do you work for them? Related industry? If this is just an investment, then your concentration is limited to the stock, if it correlates to your income, then the risk is greater, and you should be more eager to diversify. Besides BIIB, are there other concentrated positions? In either case, what is the cost basis for the shares held in the taxable account? Is it a high percentage (low gains and tax implications) or low percentage (high gains and more taxes to pay)? With BIIB and others, you might have both, and you may want to get rid of the former.

I've been where you are, and I'm still trying to dig myself out of a concentrated position. I've gotten rid of all the low tax implication shares that I've been able to, so I'm not eager to sell and pay a high tax burden, despite the need to diversify. I'm hoping for a low tax year in a few years where I can make some improvement in diversification. Meanwhile, the good news is that the concentrated position has outperformed the SP500 over that last few years. Bad news is that despite my diversification attempts, selling some fraction of shares and paying more taxes than I'd like, there have been a few periods where the percentage of concentration has increased. And during volatile periods, large losses make the percentage go down a whole lot and can be distressing, but then you have less of a problem with the high single stock. If you can hold on through these periods, you'll probably do ok averaged out through the long run. In the mean time, if you focus your efforts to add only to the diversified side of your portfolio, that percentage should naturally diminish. Sell some of your Schwab portfolio that has less capital gains. Invest dividends in diversified fund. Add new cash to diversified investments.

Ron Scott
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by Ron Scott » Tue Mar 13, 2018 5:17 am

I’m worse than you. Former employer’s stock: post-ESOP/NUA shares and options leftovers. Problem is taxes (basis is peanuts) and the fact that their significant above-market growth is affecting my motivation. Even some insiders are buying...

It’s like a drug addiction. 2018 does not look like a sell year.

The big question is do you “need” that money? If the answer is yes, a reasonable sell plan is strongly recommended,
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Tamarind
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by Tamarind » Tue Mar 13, 2018 5:38 am

Your choices aren't to liquidate all now or keep all.

If your income is relatively predictable, you can calculate exactly how much you'll pay in taxes to sell a certain amount of BIIB. If you're unsure how, we can help.

Topic Author
blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 5:56 am

Thanks all sincerely for the helpful replies! And sincere apologies for never responding myself. I first wised up to active financial management/planning in the BH mindset at the tail end of my maternity leave with my second child, and went back to work with all its tumults right after posting this topic. I find myself basically incapable of devoting significant mental energy to new learning projects like this while also working (the job is near all-consuming), so it will not be surprising that the reason I’m now revisiting things in earnest is...I’m on maternity leave again! I will reply individually shortly and also expect to be present for the next few months until I’m back at work early 2020.

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blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:02 am

tesuzuki2002 wrote:
Mon Mar 12, 2018 4:27 pm
blondebruin wrote:
Mon Mar 12, 2018 4:18 pm
I'm new to focusing on investing/retirement planning, and am aiming to replicate the asset allocation of a target date fund (haven't decided Vanguard vs. Fidelity) across my investment accounts. The hitch is that I already have a significant percentage of my investments in a Schwab portfolio that has minimal diversification: 31% of the value of all my investments is in that portfolio, and 57% of the Schwab portfolio is a single company (BIIB), such that 17.8% of my total investments are in BIIB.

I'm going for approximately 60% of my investments in domestic equity, and it freaks me out that if I keep the Schwab account as is, half of my total domestic equity won't be diversified. I'm not sure what is the best way to work on fixing this, and would appreciate any thoughts or suggestions. The simplest move seems to be to liquidate my Schwab account and move the money into indexed funds, but I'm not sure if I'm missing any hidden pitfalls with that approach. I know it's going to trigger capital gains tax, and I was considering using the cash to fund our IRAs (we're over the contribution limits so it would be an after-tax contribution that I'd backdoor convert to a Roth). Am I missing anything?
I would ask myself how much cap gains would I incur? Thousands or tens of thousands? Just a ref point.

I have a couple large holdings 8-10% in a single company. I continue to sell them off periodically because they continue to perform well.

Diversification is what you want it to be. If you have good cash flow you can take on that risk. But we’re always improving. Good luck. I think you’ve thought it thru. Time to carry it to the finish line!
It will only be about $3,000 in cap gains now that I actually do the math, which makes me want to go ahead with it. I do have good cash flow but it seems pure waste if I hold on to this stock for the next 30 years (until I retire) and subject myself to all the potential downturns that could befall a pharma company.

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blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:03 am

MotoTrojan wrote:
Mon Mar 12, 2018 10:21 pm
Side-note, but do some research on the three-fund portfolio and asset allocation, rather than just blindly following a Target Retirement fund made for the masses but not your situation/personality.

Also research whether you actually need foreign bonds, or can simplify to 3-funds (vs. Vanguards 4-fund Target funds).
Thank you! This is exactly what I have been doing. [edited to add that by “this” I mean researching the 3 fund approach.]. was using the target funds more for a benchmark of what a typical growth AA is for someone my age (soon-to-be 31). I have also been doing a lot of soul searching lately regarding international bonds and am strongly leaning toward a pure 3 fund approach instead.

Topic Author
blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:07 am

Sandtrap wrote:
Mon Mar 12, 2018 10:34 pm
Welcome.
I don't understand why you are trying to replicate a target date fund instead of getting a target date fund if that is what fits your needs.
Perhaps it might do well to step back and take a more comprehensive look at things and set up a step by step path toward long term financial goals.
As mentioned, you may incur some substantial capital gains so proceed carefully to best tax advantage. I had a recent experience converting MIL's portfolio with nearly 100% of individual stocks to a "Bogle 3 fund" and it was tricky.

First: If you care to, how about a big picture evaluation and some input within a greater context.
Use this format.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

And perhaps some review:
GETTING STARTED
https://www.bogleheads.org/wiki/Getting_started
Bogle 3 Fund Portfolio Basics and Beyond
https://www.bogleheads.org/wiki/Three- ... _portfolio
You can replicate this in Schwab with Schwab low cost index funds.

Have you done this?
Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement

I hope this is helpful.
mahalo
j :D
Thank you!! This is very helpful indeed. I’m trying to use total index funds rather than a target fund because of lower cost. I’ll look into all the resources you posted and am currently reading as many Bogle and Bogleheads books as I can get my hands on!

Topic Author
blondebruin
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Location: Boston

Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:10 am

mhadden1 wrote:
Tue Mar 13, 2018 1:27 am
Since the capital gains rate is 0% for the 12% bracket, it could ease your single stock exit pain, if you could get there. Maybe heroically increase your deductible 401k contributions if you don't already? And your MFJ partner's too, if applicable? Over a period of years perhaps?

Obviously if you are way up in the 22% bracket this doesn't help. Going forward you might have some capital losses along the way to offset the gains. Hope not I guess.

I think diversifying is the right thing to do - my only single stock is some company stock I can't easily sell. But, if I liked the stock I would not feel bad if some remainder comprised 5-10% of portfolio. Don't tell the other BHs, though. :happy

Thank you! I’ve already been maximum out 401k contributions, and these gains would be taxed at 15%. By basis is effectively zero unfortunately because I have no idea when the original shares were purchased (family lore has it that this was a gift from my great grandfather of $100 of stocks at birth, but the company wasn’t yet public and shares were initially just pennies). I will probably sell all now or over the next few years. Since everyone is talking about a crash, I’ll probably sell now and be glad to have come out with a good return.

Topic Author
blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:15 am

inbox788 wrote:
Tue Mar 13, 2018 3:06 am
Don't worry, it's a good problem to have. What tax bracket are you in? How long do you expect to be in that bracket? Is there a low tax bracket year or period on the horizon? Retirement, sabbatical, job change, etc.

How long have you been accumulating BIIB? Do you work for them? Related industry? If this is just an investment, then your concentration is limited to the stock, if it correlates to your income, then the risk is greater, and you should be more eager to diversify. Besides BIIB, are there other concentrated positions? In either case, what is the cost basis for the shares held in the taxable account? Is it a high percentage (low gains and tax implications) or low percentage (high gains and more taxes to pay)? With BIIB and others, you might have both, and you may want to get rid of the former.

I've been where you are, and I'm still trying to dig myself out of a concentrated position. I've gotten rid of all the low tax implication shares that I've been able to, so I'm not eager to sell and pay a high tax burden, despite the need to diversify. I'm hoping for a low tax year in a few years where I can make some improvement in diversification. Meanwhile, the good news is that the concentrated position has outperformed the SP500 over that last few years. Bad news is that despite my diversification attempts, selling some fraction of shares and paying more taxes than I'd like, there have been a few periods where the percentage of concentration has increased. And during volatile periods, large losses make the percentage go down a whole lot and can be distressing, but then you have less of a problem with the high single stock. If you can hold on through these periods, you'll probably do ok averaged out through the long run. In the mean time, if you focus your efforts to add only to the diversified side of your portfolio, that percentage should naturally diminish. Sell some of your Schwab portfolio that has less capital gains. Invest dividends in diversified fund. Add new cash to diversified investments.
Very helpful, thanks! Basis is zero, tax bracket is 35%, and I expect to be in the same job long term with only equal and higher tax brackets in my future. Honestly I haven’t been accumulating BIIB at all—it was a shockingly fortuitous pick by my great grandfather decades ago that’s done very well with several share splits and lots of growth. I feel like at this point I should quit while I’m ahead and get a clean slate going for a three-fund portfolio.

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blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:16 am

Ron Scott wrote:
Tue Mar 13, 2018 5:17 am
I’m worse than you. Former employer’s stock: post-ESOP/NUA shares and options leftovers. Problem is taxes (basis is peanuts) and the fact that their significant above-market growth is affecting my motivation. Even some insiders are buying...

It’s like a drug addiction. 2018 does not look like a sell year.

The big question is do you “need” that money? If the answer is yes, a reasonable sell plan is strongly recommended,
We don’t need the money. The main motivation is promoting simplicity in my portfolio and distancing myself from the heartache of volatility in this one large position.

Topic Author
blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Mon Sep 02, 2019 6:19 am

Tamarind wrote:
Tue Mar 13, 2018 5:38 am
Your choices aren't to liquidate all now or keep all.

If your income is relatively predictable, you can calculate exactly how much you'll pay in taxes to sell a certain amount of BIIB. If you're unsure how, we can help.
Thank you! As of today, I have $20,217 in BIIB, zero basis, taxed at 15% cap gains. So it’d be a $3,000 tax bill, which we can afford. I think I’d rather do it now than hope things get better. I can’t see tax rates going down soon and there are a lot of reason the company’s stock could decrease...

penumbra
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by penumbra » Mon Sep 02, 2019 10:28 pm

I have some idea of your situation. Have very large gains in a few tech stocks, and it gets very hard to think about selling. But $3000 is a relatively small hit. If the stock goes up, it’ll be harder yet. If it goes down, you stand to lose lots more than you save by paying lesser taxes. I’d sell and be done with it. Good luck!

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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by rossington » Tue Sep 03, 2019 4:49 am

Your basis is what the stock value was on the date you acquired it...not zero. If Biogen went public in 1991 how did you acquire shares at birth?
But, aside from that 3k is not a "tax hit" for you since the stock was a gift in the first place.
AND at 31 you can afford to hold it and wait until it gains value and sell then....although it has had a rough ride since March. You need to stay on top of the company to determine if it is worth holding.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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blondebruin
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by blondebruin » Wed Sep 11, 2019 6:42 am

I understand that my basis isn’t literally zero, but I went through a whole thing last year trying to figure out what my basis actually was and it wasn’t worth it. My family has kept no records, and I was likewise surprised to learn Biogen hadn’t gone public until I was 3 given that the family lore was always “at birth,” which can’t literally be true. Biogen shares have been as low as a few cents at some points, so absent any support for choosing any point in time to estimate he purchase price, it wasn’t worth it to try to allocate anything more than zero as my basis. I’m extremely conservative, so I preferred to take the approach with no likelihood of IRS challenge rather than assigning something arbitrary.

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LilyFleur
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Re: Need help diversifying -- 17.8% of investments are in a single stock

Post by LilyFleur » Wed Sep 11, 2019 11:23 am

mhadden1 wrote:
Tue Mar 13, 2018 1:27 am
Since the capital gains rate is 0% for the 12% bracket, it could ease your single stock exit pain, if you could get there. Maybe heroically increase your deductible 401k contributions if you don't already? And your MFJ partner's too, if applicable? Over a period of years perhaps?

Obviously if you are way up in the 22% bracket this doesn't help. Going forward you might have some capital losses along the way to offset the gains. Hope not I guess.

I think diversifying is the right thing to do - my only single stock is some company stock I can't easily sell. But, if I liked the stock I would not feel bad if some remainder comprised 5-10% of portfolio. Don't tell the other BHs, though. :happy
+1

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