Sentimental Stocks and What To Do With Them

You probably know someone in this situation, or maybe you’re in it yourself: holding a large position in a single stock. You might have earned it over a long career at the company, or inherited it from a spouse, or received it as a loving gift. Through appreciation and steady, increasing dividend reinvestment, the position has grown quite large. But has it grown too big? Has this legacy stock become a potential problem, representing needless and dangerous risk? Here are some thoughts:

What’s the problem here?

Problem number one with single stock positions is excess risk. Single stocks can create wealth, but are far less effective at preserving wealth. To preserve wealth, you want the opposite — diversification across many companies and sectors. No matter how big and indestructible it seems, any single company can disappear without warning. Sometimes companies vaporize through fraud, like Enron (once the 8th largest stock in the US) or WorldCom, formerly MCI. Or go bankrupt, like General Motors in 2009. Or shrink to shadows of their former selves, like Sears, KMart and Macys.

Any one company can lose all of its value in weeks or months, but a bundle of hundreds of stocks across multiple industries and geographies won’t. Because it so drastically reduces risk, diversifying is the easiest and smartest thing for any investor to do. Even if it means selling a sentimental holding.

Don’t count on the rare exception

If you have a big single stock position, you may want to hold it “forever” because it has done so well for so long. If that’s the case, you’ve been very fortunate. Success that lasts forever is the rare exception in the corporate world. For every century-old General Electric, there are dozens of Singer Sewing Machines. Singer was the hottest IPO in 1960 when everyone was going to make their own clothes with the company’s reliable machines. That trend is long gone. Singer went bankrupt in 1999. There are very, very few real long term winners through generations.

The right answer is also the hardest

What should you do with a legacy stock holding? For reasons described above, the obvious solution is to “just sell it.”  Selling is the prudent, responsible portfolio move to make in almost all cases. However, you’ll need to work through some human nuances and emotions to make it happen. Here are some options that have worked for our clients. Perhaps one or several them can work for you, too.

• Keep a small portion – say 1% of your portfolio – to honor the legacy
• Use time to soften the blow; sell a fixed percentage every year – 10% or 20% – until your overall risk returns to its correct level
• Buy and hang a framed, dated certificate of the first 100 shares as a reminder of how it all began (Google “stock certificate reproductions” for lots of choices)
• Have a conversation – What would you recommend to your dearest friend if she were in this investment situation?
• Have another conversation – How would you feel if this stock fell by 90%?

But what about taxes?

If your legacy stock was purchased decades ago, it may have a very low cost, leading to a big tax bill if sold. Clients are of two minds on taxes; some say “I never pay taxes” and will do anything to avoid a tax bill. Others accept that the government will get its share, and appreciate that the capital gains tax rate is relatively low. You’ll have to decide where you stand on this important issue. But either way, don’t let a potential tax bill cloud your thinking about single stock risk. Too many times I have seen a quick 50-90% price drop wipe out any tax “problem.” Ouch!

Planning over worry

Face it, parting with a sentimental holding can cause sadness and distress, but wealth disappearance can cause real, lasting problems and changes in lifestyle. Instead of fretting too much, start talking and start planning. There are reasonable choices and they can be made to fit just right for you.

John Osbon – josbon@osboncapital.com