FAQ: I inherited a lot of shares of a single stock? I am worried it is too much in one stock, but don’t want to sell it. What should I do?
Answer: This is a very difficult emotional decision for many. When inheriting shares of a company that were held by your parents, grandparents, or other beloved family member, it can often feel like a betrayal to sell any of that stock. In reality, most people that come to us with this problem have way too much of their portfolio tied up in this one stock. Overconcentration in the shares of one company can lead to the equivalent of gambling your future on the future of one company.
Although this can lead to outsized returns over time if your instinct is right, if wrong, overconcentration can be devastating. In financial planning, we don’t like to gamble your financial future. Good financial planners use diversification and asset allocation to ensure that your money is there when you need it and grows over a long period of time.
It seems unlikely that companies like Apple, Disney, or Home Depot could possibly struggle or go out of business, but it is not as uncommon as you think. Nobody could have imagined in the year 2000 that General Electric, General Motors, or Exxon Mobile would be either out of business or materially irrelevant to our stock market and economy in 2021, but that is where we are. GE, the greatest performer of the 20th century has been the worst performer in the Dow Jones Industrial Average in the last 21 years, hanging on for its life at present. A $100,000 investment in this “blue chip” in 2000 would be worth roughly $26,000 today, while an equivalent investment in the S&P 500 would be worth more than $300,000 in the same amount of time.
This may seem bad, but it is far better than investing that $100,000 in General Motors in 2000. This 100-year old company that was the leader in the automotive industry filed for bankruptcy in 2009, essentially eliminating your investment.
The point is not to scare you into avoiding investing, but to understand no matter how solid a company looks at any time, economics, management, and technology are changing so fast, it will be hard for any one company to dominate. The past is not a strong indicator of the future and it would have been hard to predict, in 2000, that a company like Apple, that was months from bankruptcy or Amazon, that was struggling with all tech stocks when the bubble burst, would be the next great stock picks of the future.
The easy solution: Don’t play the game. If you want to maintain the legacy of your loved one, hang on to the inherited stock, but keep it to no more than 5% of your total net worth. Sell the rest. You can then experience the joy of being connected to your loved one without the risk that they might put you on food stamps in the future.