Alternatives to help with investment goalsPublished 9:40pm Saturday, January 14, 2012
When it comes to managing the wealth you’ve accumulated in any one stock, have you ever asked yourself, “How much is too much?” Holding a large position in one stock generally increases your risk level compared to a well-diversified portfolio.1 In 2006, Congress posed (through the Pension Protection Act) that if an investor has more than 20 percent of a portfolio in one security or industry, the portfolio may not be properly diversified. Your specific risk tolerance may allow for more or less than 20 percent of one security.
An investor with a significant portion of his or her wealth in one stock may have accumulated that concentrated position in a number of ways, such as:
Equity compensation, including stock options and restricted stock
Building sizable positions of company stock in an employer-sponsored retirement plan
Being a corporate insider and subject to further “windows” or restrictions to follow upon sale of the stock
Selling a business and receiving stock in a publicly-traded company in return
Inheriting sizable stock positions built over multiple generations
If you find yourself in a situation where you need to increase cash flow, reduce your portfolio’s risk profile by diversifying your investments, or reduce adverse income and estate tax consequences, your Financial Advisor can help you sort through your circumstances and work with your tax and legal advisors toward your objectives. The following descriptions give an overview of several alternatives you may want to consider for managing your concentrated equity position.
Gradually selling and repositioning. Sometimes the simplest strategy can be the most appropriate. You can gradually sell shares and reinvest the proceeds into investments that may better meet your changing needs. By selling over time, you can spread your gain (and corresponding tax liability) over time, perhaps several tax years (discuss this with your tax advisor). Not only can this strategy help you diversify your portfolio and maintain full control of after-tax proceeds, it can also help you retain control of your financial situation, stopping and starting the sale of shares as needed. This gives you the chance to reinvest proceeds over time, adjusting your investment selections as appropriate.
You may want to combine this basic strategy with more advanced strategies, such as hedging or establishing a charitable remainder trust. (Note: if you are a corporate insider or manager, your
company’s policies may not allow certain hedging or options-based strategies. Be sure to check with corporate counsel before embarking on any of these alternatives.)
Estate planning and charitable techniques. Many individuals with substantial positions in one stock look for strategies that can help reduce overall income and estate tax liabilities and achieve philanthropic goals.
There are charitable giving strategies that can provide you a current income tax deduction, a continuing source of income for you, and a way to potentially avoid paying current capital gains tax on appreciated assets. Some strategies also can help shield the donated assets from estate taxes. And when you consider current income tax rates and estate tax rates, you and your heirs may benefit substantially from these techniques.
Borrowing against your stock. This alternative helps you generate cash without selling your stock and avoids generating a current tax liability.
You diversify your portfolio by purchasing other stocks with the loan proceeds. When you borrow on “margin,” or use your stock as collateral, you can often borrow 50 percent (and in some cases more) of your position’s market value at competitive interest rates as long as the stock meets certain minimum qualifications.
Margin borrowing involves a high degree of risk and may not be suitable for all investors. With this strategy you must maintain a minimum amount of equity in your margin account. Market conditions can magnify any potential for loss. If your collateral stock’s price drops, you may receive a margin call, which means you will be obligated to bring your account into balance by depositing cash or other stocks immediately.
Otherwise, you may be forced to liquidate all or a portion of your position.