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Enough I$ Enough

Just recently, I was able to spend a few days in Jamaica with Michelle and a handful of friends.  With beautiful weather and a resort package, my Irish back and belly were Red Striped. Four days were probably ample. Plenty ample.  Blessed with a 16-hour travel day home[i] it gave me sufficient time to ponder the current bull market.  We just celebrated the 9-year anniversary of the March 9, 2009 market low.  By most historical measures, it is the 3rd longest in recorded history.[ii]   This definitely helps the overall wealth effect but it also creates special challenges.   One of which is an outperforming stock becoming an over-weighted portfolio lever. While we admire the courage to let your winners run, there comes a time to ask the question: now what?

We would consider an over-weighted stock to be anything over 8-10% of cumulative investments – some would argue even less than that.  This does not include mutual funds because, by their very nature, they are diversified.  These investment winners breed attachment. They become a loyal family member. Even if they are held in a tax advantaged retirement account, divesture becomes emotionally difficult.  Sell is a four-letter word. More on that later. But what about dealing with a low-cost basis stock and large imbedded, taxable gain? Let’s assess some strategies that may soften the separation anxiety.

Sell Stops

Short of selling the stock outright, you could use a mental sell price anywhere from 8-12% below current market.  This effectively sets a floor on the stock should it start to decline. Doing this in advance takes away the mental angst we all experience in turbulent markets.  For example, company XYZ is $50/share. You might set a $45 sell-stop that would be initiated only at that price. Should the stock keep rising, you can continue to raise the sell-stop accordingly.  Thus, benefiting from further appreciation. If the sell stop is triggered, the stock is sold and you have a taxable event.


For those charitably inclined, this could be a more attractive avenue.  Instead of giving your church or favorite charity cash, give appreciated stock.  You will avoid capital gains and the full market value will be eligible for an income tax deduction[iii]. Perhaps your do-gooding will be awarded an express pass on the spiritual Up-Escalator.  2018 tax reform provides a wrinkle but the box below illustrates the basic premise. Most charities are now set up to have the shares wired directly from your brokerage account for seamless administration.

You can also gift shares to a family member instead of cash. You won’t receive a tax deduction but you will remove the capital gain from your portfolio. The cost basis will transfer to the new owner. Your child may be able to sell the shares at a 0% capital gains rate.

Upstream Gifting

This technique would involve gifting your shares to your (elderly) parent.   Your cost basis would transfer as well. Upon death, the shares are bequeathed back to you with a stepped up, fair market value, cost basis.   In effect, all capital gains are dissolved. A couple caveats: the decedent (parent) must live for at least 1 year from date of initial gift. And you want to be sure the estate planning documents name you as the stock’s inheritor.  This is especially important for larger families. One workaround for the 1 year holding period would be for a grandchild to be named the stock benefactor. This method may seem a bit morbid, but it is perfectly legal and provides sound tax/estate planning.    

Stock Swap Fund

For the big hitters out there, this might be worth consideration.  But it’s pretty intricate. This strategy resembles a 1031 like-kind exchange but involves an exchange fund.  For the exchange fund to qualify, the fund must have 20% of its fund value composed of non-publicly traded securities such as private equity, limited partnerships or real estate.  The exchange fund needs to run at least 7 years before being liquidated. Capital gain taxes are due when sold but it does accomplish the goal of asset diversification and delaying capital gain taxes.  You would need a major financial institution like JP Morgan, Goldman Sachs etc. to initiate this.

Whether you bought a winning stock or inherited it, there’s a strong chance you’ve emotionally adopted it.  It becomes a financial blue ribbon – validation of how smart you are & how well it’s treated you. Fundamentals aside, it’s really illogical when you realize the stock doesn’t know you.  It’s basically just a number on an account statement. The bigger picture is judiciously managing said winner. Don’t blindly extrapolate past performance indefinitely into the future. History has shown that no company is immune to shifting consumer preferences, economic recessions or bear markets.  Love your spouse, family, friends & pets; not your investments.[i] Jenny is relieved of travel coordinator duties[ii] Leuthold Group[iii] Consult your tax advisor given the new 2018 tax reform and raised standard deduction


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