What do do with my individual stocks

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kinersroundededge
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What do do with my individual stocks

Post by kinersroundededge » Thu Jan 20, 2011 4:31 pm

Hi all - first post here, so please excuse any inadvertent breaches of decorum.

I'm in my early 30's and am taking stock of all of my holdings. I'm in good financial shape - no debt - and a stable job situation (government attorney). I'm contributing to a Roth IRA as well as a government 401(k) equivalent, and am regularly investing my taxable money in index funds (Vanguard). However, I also have a very high percentage of my net worth in individual stocks that were purchased for me by relatives over the years.

The stocks are mostly long-term holdings, have generally done very well over the long term, and have contributed significantly to the size of my net worth. However, as I'm very much a believer in index funds generally, I'm concerned about having a lot of my net worth tied up in individual stocks due to the risk involved. Specifically, of my total net worth, a little less than 1/3 of it is in individual stocks, and this worries me.

So the question is - should I sell most (or all) of the individual stocks due to the risk and invest the proceeds in my index funds? Or just hold on to the stocks? The downside to selling (other then the sentimental value of the stocks) would seem to be the tax implications, although I'm pretty sure they'd all be long-term cap gains - in retrospect, the smart thing probably would have been to sell them all when I was in law school and had zero or little income, and I probably would have had to pay no taxes. Oh well.

Anyway, any advice would be appreciated - and if I omitted any details that would be helpful to answering my question, let me know and I'll try to provide them.

livesoft
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Post by livesoft » Thu Jan 20, 2011 4:43 pm

When someone gives you stock, your basis is their basis. Sometimes the giver believes that your basis is the based on the day they give you the stock. That's not true, unless I think the stock is at a lower price on that day than their basis. Check the IRS regs.

So what to do? First, you need to know the cost basis of these things. Do you have the records?

Second, I would probably figure out how diversified the stocks that you have and treat them as part of your asset allocation (large cap, small cap, foreign, domestic, etc). I would start donating shares to charity every year to avoid the headache of figuring out cost basis, unless you have that nailed down.

If I had any losing positions, I would sell right away.

I also would not sell them unless an individual issue was more than 5% of my portfolio. Then I would sell to bring things in line to that 5% and also to my asset allocation.

Does this make sense?

hlfo718
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Post by hlfo718 » Thu Jan 20, 2011 4:44 pm

I went through the same as you not long ago. I bit the bullet and dumped most of my holdings and purchased index etfs. I do still hold some stocks but relative small %. Now I actually spend much less time researching on stocks and more time reading books. One of the best decision so far in my life.

Stonebr
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Re: What do do with my individual stocks

Post by Stonebr » Thu Jan 20, 2011 4:56 pm

kinersroundededge wrote:the sentimental value of the stocks
I think it was financial writer Adam Smith who said, "Don't fall in love with your stocks. They don't know that you own them." You probably own these stocks in your index funds too.

As for the rest of your question, taxes are best avoided. But you say this is worrying you, and that's not a good thing. You don't have to sell them all at once. Why not knock off an obvious one or two for starters? There may be one with the smallest amount of taxable gains for instance. Start there and see how it feels. Sell down to the point where you aren't worrying.

I don't see anything wrong with holding individual stocks. (I don't do it myself, but my wife has some GE from her grandmother.) It's trading in and out that gets people in trouble.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

kinersroundededge
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Thanks for the responses

Post by kinersroundededge » Fri Jan 21, 2011 10:21 am

Thanks for the helpful responses. In response to some of the questions/comments -

1) I have no idea what the cost basis of the various securities are - from what I hear, figuring out that info is something of a nightmare, especially given that most of them are in a DRIP. Question for a novice: when you sell shares of a stock, will the company that processes your transactions (Computershare in this case) automatically send you a tax form with that sort of stuff calculated (as it does annually with dividends), or will it still be up to me (or a tax preparer) to figure this out?

2) In particular, there are 2 companies that comprise the vast majority of these stocks - AT&T and Union Pacific. Together, shares of these companies alone comprise roughly 25% of my entire net worth (each one is between 10 and 15%). Now, neither of these companies is going away anytime soon, but it still seems risky. Does that change anyone's analysis?

Jacobkg
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Post by Jacobkg » Fri Jan 21, 2011 10:35 am

One consideration is that the long term capital gains rate is only guaranteed to stay at 15% for two more years.

I was in a similar situation to you a couple of years ago. I bought the tax bullet and sold all my individual stocks to exchange them for index funds. I have no regrets about my decision.

Here is the thread I started back then. Larry Swedroe had a good response, I thought:

http://www.bogleheads.org/forum/viewtop ... highlight=

dbr
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Post by dbr » Fri Jan 21, 2011 10:36 am

I don't actually know what Computershare will automatically send you, but it is definitely worth talking to them to find out if they can provide the data you need. What they are required to supply is only a 1099 to you and the IRS reporting the sale of your shares and not the cost of them. That rule is changing for positions initiated after 1/1/2011, but that doesn't help you right now.

There isn't even a discussion that holding a large fraction of net worth in two companies is a risk a person should not carry. You can say AT&T and GE and I can say GM. However, there are some considerations. If you are currently saving at a high rate, those holdings may not be a large fraction of your assets as time goes on. Is that the case for you? Secondly, if you have the data to sort it out, some of those shares may have much less capital gain than others. You can start selling shares with little gain to reduce the holding a lot at little tax cost, if things stand that way. Depending on your income, the tax cost may not be that great. If you can sell and keep your tax bracket including the gains inside the 15% bracket, there is no tax on capital gains. Or, that part of the gain still inside 15% bracket is tax free. I think that is still true in 2012 as well. If there is an incentive to make gifts to anyone, charitable or otherwise, gifting these assets directly can save tax cost to both of you. That would be in preference to holding the stock and giving cash to someone.

YDNAL
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Re: Thanks for the responses

Post by YDNAL » Fri Jan 21, 2011 10:42 am

kinersroundededge wrote:Thanks for the helpful responses. In response to some of the questions/comments -

1) I have no idea what the cost basis of the various securities are - from what I hear, figuring out that info is something of a nightmare, especially given that most of them are in a DRIP. Question for a novice: when you sell shares of a stock, will the company that processes your transactions (Computershare in this case) automatically send you a tax form with that sort of stuff calculated (as it does annually with dividends), or will it still be up to me (or a tax preparer) to figure this out?

2) In particular, there are 2 companies that comprise the vast majority of these stocks - AT&T and Union Pacific. Together, shares of these companies alone comprise roughly 25% of my entire net worth (each one is between 10 and 15%). Now, neither of these companies is going away anytime soon, but it still seems risky. Does that change anyone's analysis?
1) The broker/agent that sells the shares (Compushare, in your case) will give you a 1099 showing the proceeds of the sales, net of any charges. As far as knowing the basis to compute gain/loss, this is your responsibility.

2) You said individual stocks are near 1/3 of your total net worth; and now expand that information to include that 25% of net worth is invested in 2 stocks. This is undiversified risk that you should address quickly - regardless it you think that AT&T or anyone else is "not going away anytime soon."
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

kinersroundededge
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Post by kinersroundededge » Fri Jan 21, 2011 11:31 am

Thanks again for all the help - it's amazing how many people seem to be in similar situations; I guess it's because mutual fund buying was less accessible in the past than buying individual securities. And apologies for not including the relevant info about the 2 huge-percentage securities in my original post; I didn't realize its relevance until later.

So now the big heavy-lifting, I guess, is trying to at least figure out the tax consequences. On the bright side, I'm fairly certain that both my parents (who have a lot of the older records) and my grandmother (who gave me most of these securities) are pack-rats...

livesoft
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Post by livesoft » Fri Jan 21, 2011 11:32 am

So your relatives bought you stock and stuck you with all the calculations.

With your DRIPs, you should turn off all automatic re-investment of dividends today. Why keep buying shares and creating a bigger mess?

Other than that, my advice does not change.

kinersroundededge
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Post by kinersroundededge » Fri Jan 21, 2011 1:16 pm

Yup, the first thing I realized I should do is turn off the DRIPs, and I'll basically take every dividend check I get and stick it straight into one of my index funds.

phositadc
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Post by phositadc » Fri Jan 21, 2011 1:50 pm

I was in a similar situation to you last year and sold 100% of my individual stocks. My tax bill this year will be nearly $60,000 (including the ~10% due to California... awesome!) due to the capital gains, but frankly, if one of the companies for which I held an individual stock went bankrupt, it could easily have cost me just as much.

Some people would advise that if you have large capital gains that you should hang on to the individual stocks. Personally, I'd rather pay the tax bill and have the simplified and diversified portfolio that index funds provide. Especially when your time horizon is 30 years or so, like yours probably is.

If you were 60, maybe it would be better not to realize the gains.

kinersroundededge
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Post by kinersroundededge » Fri Jan 21, 2011 2:00 pm

chrikenn, are you referring to a $60K tax bill just for the capital gains themselves? Were those all long-term? By that count, I assume you had a lot more in value than I do. Overall, the total value of my individual stock securities is around $120K, which is a good chunk, but just doing quick-and-dirty math, even if that entire value were capital gains, taxed at the 15% rate, that would still be only $18K in taxes...

rai
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Post by rai » Fri Jan 21, 2011 2:10 pm

kinersroundededge wrote:Yup, the first thing I realized I should do is turn off the DRIPs, and I'll basically take every dividend check I get and stick it straight into one of my index funds.
yes taxes are a burden keeping track of small purchases. I turn off drips for all taxable accounts.

I guess I'm only half a boglehead because I converted to the idea of low cost index funds for all future purchases.

I sold all my stocks which had a loss, but the ones with gains I am still holding on as I don't want to give the taxes away and the holdings will become smaller part of my portfolio as I add funds.

Stocks have no cost to hold (just increased risk due to what I call the "BP-stuff happens effect").
"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

Value_Investor
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Post by Value_Investor » Fri Jan 21, 2011 2:17 pm

livesoft wrote:So your relatives bought you stock and stuck you with all the calculations.

With your DRIPs, you should turn off all automatic re-investment of dividends today. Why keep buying shares and creating a bigger mess?

Other than that, my advice does not change.
Ok, assuming he wants to rid himself of the individual equity positions immediately then DRIPS are a waste.

But how on earth can you say that a COST FREE Drip program is something he should turn off immediately? DRIPS (and I own ATT with their DRIP program so I know it has zero transactional costs) are the ONLY way to invest with zero cost. You can't buy anything from Vanguard with zero cost, not a single ETF or MF with zero market friction.

livesoft
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Post by livesoft » Fri Jan 21, 2011 2:28 pm

Since you asked, ....

Stock DRIPs are an anachronism and obsolete in the modern world of no-commission stock brokers. In the 1960s they were a great thing when commissions were $300 a pop, but now that one can buy for $0 a pop AND get great accounting and reports, there is no point. Welcome to the 21st Century.

And I do not use Vanguard to buy my stocks.

MP173
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Post by MP173 » Fri Jan 21, 2011 2:49 pm

Concentrated holdings in a few stocks can be dangerous. You must watch it like a hawk.

No one can tell you what is going to happen to ATT or UP. However, one can take a look at UP and note the following:
1. They have one competitor (BNSF)
2. While coal out of Powder River Basin will probably drop as US moves away from coal, they are sitting on considerable energy growth potential with the ethanol moving from the corn belt to both coasts on regular movements. At this time, ethanol cannot move by pipeline.
3. Long distance trucking is declining with intermodal movements via double stack trains showing steady growth.
4. Re-regulation as proposed by Oberstar is done, as he was defeated in November. Railroads have incredible pricing power at this time.
5. Other than CP's possible expansion into PRB...they will see no further competition other than BNSF...and both railroads are pretty well set with volume levels.
6. UP is a play on energy, both as an efficient provider of transportation and the above mentioned transporter of ethanol and coal. An example of their "efficiencies" are the unit train movements of fruits and vegetables from the valley in Ca. and Washington/Oregon on a several times per week basis to the Northeast. This is business that 5 years ago was moving by truck...now it is huge growth for UP.

I could go on and on, but here is the point...unless you want to dig in and understand a company, perhaps you shouldnt own it. You probably should trim back on both if you decide to keep them.

Personally, I own a railroad stock (not UP) and my returns from that holding have far outperformed the market.

Good luck,

Ed

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nydad
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Post by nydad » Sat Jan 22, 2011 12:09 am

A great selection of articles on this topic can be found here:
http://www.altruistfa.com/readingroomar ... dPositions

My favorite thus far is this one:
https://institutional.vanguard.com/iwe/pdf/FASACE.pdf

"... our research suggests that immediate liquidation is the best solution for the vast majority of investors."

You may want to consider some of the other options in the vanguard paper, but it depends on how big the positions are - and the options seem quite complex.

I am in a very similar situation to yours. 6 months ago I had ~90 equity positions. Now I'm close to getting it down to around 25 positions, mostly funds with a few remaining stocks that I want to keep. I feel much better about my asset allocation, and rebalancing will be possible (its harder to rebalance with individual stocks)

I second the advice about considering giving. Look at Fidelity charitable gift fund. You could take some of the assets that were given as gifts and regift them to a charity like Fidelity, then let it grow tax-free and pay out the proceeds over time to charities of your choice + lots of other advantages. And you get a nice tax deduction.

I'd consider doing this for at least a percentage of the stocks with the highest gain, or perhaps those for which it is hardest to get tax-basis information for. Think of it as a form of regifting... and rather than see it as a charitable contribution for this year, think of it as a building a charitable portfolio which you can draw from every year for the next 30 years.


==
I still have one stock that is about 10% of my portfolio. I've been selling bits of it over time, I haven't been able to pull the trigger on dumping all of it but I'm going to this year.

On AT&T, I'd def. consider trimming that one. The telcos at least in the US have not been able to create significant shareholder value in spite of massive investments in the network and expansion of utilization by consumers. In a way they've become commoditized, so my guess would be AT&T as a stock is unlikely to behave like it behaved in the past 20 years - it might be rather boring - and they've just lost the exclusive right to the iPhone.

one more reason to sell: cap gains are historically low - take a look at this chart:
http://www.cch.com/wbot2006/022CapitalGainsRates.asp

So while its terrible to have to pay that tax, you're getting diversification and possibly better longer term returns. At least that's what I keep telling myself as I prepare to write a huge check to the govt for 2010 cap gains!

phositadc
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Post by phositadc » Sat Jan 22, 2011 10:58 am

kinersroundededge wrote:chrikenn, are you referring to a $60K tax bill just for the capital gains themselves? Were those all long-term? By that count, I assume you had a lot more in value than I do. Overall, the total value of my individual stock securities is around $120K, which is a good chunk, but just doing quick-and-dirty math, even if that entire value were capital gains, taxed at the 15% rate, that would still be only $18K in taxes...
Yep, 60K tax bill just for the capital gains... 100% were long-term capital gains, too (of course, most states tax capital gains as ordinary income... so my taxes were really like 40K for federal and 20K-ish for state).

Yeah, a huge, ridiculous tax bill, but as I said above, if just one of the companies for which I owned the individual stock tanked, I could easily have lost just as much. And this way, I now have a portfolio that is far more diversified but at the same time simplified. I spend less time thinking about and I sleep better at night, so for me, the huge tax bill was worth it.

rcashdan
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Post by rcashdan » Sat Jan 22, 2011 10:22 pm

It's a detail, but DRIPS charge a hefty fee when you sell the shares. Check with Computershare or other service that affects you.

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chuck-lyn
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Post by chuck-lyn » Sun Jan 23, 2011 12:17 pm

You could easily take a 15% hit in the next market swoon. If you are the charitable type, you could set up a charitable fund through Vanguard (or Fidelity as previously mentioned) with part or all of your stocks and have a tax write off for years to come. In any case, I would pay the 15% tax bill gladly and say a prayer for your benefactors.

Cheers,

charlie

Abbey
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Post by Abbey » Sun Jan 23, 2011 12:30 pm

Computershare usually has records of your DRIPS 5-10 years back. Sometimes further. Get as much information as you can on the dates & prices; put it into a spreadsheet or Quicken.
Identify the lots you sell. If you use average cost once, you must use it for all future sales of that stock.
Subdivide your spreadsheet to distinguish the purchases you can't find prices/dates. As you want to make charitable donations, THESE are the ones to gift.
As others stated, turn off the DRIPS. Don't need a wash.
Abbey

livesoft
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Post by livesoft » Sun Jan 23, 2011 12:34 pm

One cannot use average basis for stocks and ETFs.
Average basis is only for mutual fund shares.

It did come up elsewhere on the forum what is your basis for ETFs that were converted from mutual fund shares that were using average basis due to a previous sale? I don't know the answer to that one.

kinersroundededge
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Post by kinersroundededge » Mon Jan 24, 2011 11:46 am

Just wanted to again thank everyone for all the very, very helpful advice. As a newbie to this forum, I really appreciate it, and I'll definitely be back!

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