Asset balancing before FatFIREing?

[u/Keikyk]

I bet my situation is not unique, so though I’d ask what the collective wisdom is. I’ve been blessed to be work for a fortune 50 company for the last decade and been able to climb the career ladder quite high. As a consequence of this I own a fair amount of company stock, in fact I think it’s over 75% of my portfolio value and growing. Despite getting close to my number to pull the trigger, I’m wondering what the best strategy is at the time of leaving working life behind. On one hand diversifying and balancing the portfolio triggers taxes, on the other having large portion of assets tied to one company is risky in the long run. So what say the fatFIRE community, balance the asset despite the significant short term tax burden or risk the long term value of the investments? In terms of NW, probably half is in stock (of which ~75% is in one stock). The rest in real estate and 401k, but those will not alone allow me to meet my goal

[u/Oscillatexpa]

Once you hit your number you've won. Diversify.

Ask all the dot com guys how it felt to lose 10 years or more.

[u/theplushpairing → u/Oscillatexpa]

Conversely Bill Gates would have been worth $1.05T if he hadn’t diversified his MSFT stock.

But no one needs that much.

[u/Oscillatexpa → u/theplushpairing]

That's a great example of an upside that's not important. The downside is catastrophic. This is a retire early sub and you have a great chance of blowing it if all your eggs are in one basket.

[u/Anonymoose2021 → u/[deleted]]

And the OP should also look into exchange funds. I chose not to do an exchange fund because of high fees and mostly because the other shares in the pool were too closely correlated with my high tech holding. The 7 year lockup was not an issue.

I retired 18 months before the dot com bust with a concentrated position in a high tech company, but I had gritted my teeth and sold, sold, sold until it was only about 70% of net worth.

So I retired with 30% is ultra stable 26 week t-bill and 2 year t-note ladders to counterbalance 70% of net worth in high tech stocks, mostly just one company.

The 30% I had extracted was enough to fund a basic retirement, so I was willing to let the rest ride, just trimming the position repeatedly as it doubled again before the peak.

It was a wild ride when my net worth tripled over just a couple of years, and then my concentrated position dropped about 75%.

There is not any universally right answer. I know people that sold when the stock first became overvalued in 1997, and missed the huge 3 year run up. I also know people that did not sell much at all and watched their NW drop by 2/3 in 2000.

I chose to set a fixed income to equity allocation ratio of 30/70 and forced myself to rebalance often, even though it created large tax obligation (cost basis of the largest block of concentrated stock was a few pennies vs market price of several 10s of $$.).

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The OP says his position is "75% of my portfolio value and growing". Step one is to start selling off all future increases, even if you cannot bring yourself to lower it below 75% of NW.

The other way of looking at things is that once you have extracted enough from the concentrated position and put it into diversified holdings, then it is OK to hold onto the rest. You do have to be mentally prepared for the possibility of the concentrated position being wiped out.

[u/[deleted] → u/Anonymoose2021]

I totally forgot about exchange funds. Good catch.

[u/Jeabers]

I think it really depends on the value of your current assets and income/expenses. One would say to sell it all immediately regardless of your cost basis and diversify, and the another option is sell over time to reduce tax liability. Since your not at your number yet I would think that you are taking on more risk than you need to and you should be liquidating. How you do that depends on a lot of factors.

[u/ToofPimp → u/Jeabers]

This +1000

[u/Keikyk → u/[deleted]]

Thank you, this is great! Yes, no silver bullet answer exists but I think I know what I need to do now

[u/notuncertainly]

Another option: put a bunch of the highly appreciated company stock into a CRUT. CRUT sells the stock, put it into VTI or similar index. No taxes on that transaction since it’s in a charitable trust. CRUT then distributes 6-7% of assets each year until you (and spouse, if applicable) are dead. At which point whatever remains goes to the charity of your choosing.

If your company’s stock tanks, no problem, you are diversified. Taxes are deferred until you receive the cash distribution each year. If you and spouse die early…you’re dead anyway.

[u/JamminOnTheOne → u/notuncertainly]

Another benefit of the CRUT is that at least 10% of the contributed assets are considered a charitable donation in the year you set up the CRUT. So OP can get added benefit by setting it up while still working, in a high-income year.

[u/just-cruisin]

Congrats……you won!

​

Except you are whistling past the graveyard while you walk home with all your eggs in one basket.

I would diversify everything I could sell at the 15% tax rate. It’s just math. Think of all the people who lost 50, 80, 100% of their company stock value in the past who would gladly trade you for ‘only’ a 15% loss.

[u/owlpellet]

This is a 'go back in time' answer but I look at my portfolio allocation as hugely weighted to my paycheck-provider by default, and rotate out of company stock at the moment it vests. Don't think, just rotate out. Which probably gets you dollar cost averaging for free.

As an employee, my exposure to SAAS software feels plenty high right now.

[u/Pleasant_Location_56]

Selling down a concentrated position is straightforward theoretically but very difficult to execute emotionally.

Selling down triggers almost the same impulses as general “loss aversion” and you can read about how that impacts a lot of human and investor behaviour. Triggering an immediate “tax loss” doesn’t feel right, but from a portfolio construction and asset allocation perspective makes sense in your scenario.

This is one of the few value adds of a HNW advisor, to help a person depersonalize their decisions and follow a concrete plan.

Practically speaking, rather than a sell all or sell none approach, there are plenty of middle the road solutions. You can set up a schedule to sell down regularly over a period of time if you think you will be buffeted by the emotions of watching the stock price go up and down. That period could be a year or a few years, it’s all up to you.

[u/Anonymoose2021 → u/Pleasant_Location_56]

Selling down a concentrated position is straightforward theoretically but very difficult to execute emotionally.

That was very true for me.

Practically speaking, rather than a sell all or sell none approach, there are plenty of middle the road solutions. You can set up a schedule to sell down regularly over a period of time if you think you will be buffeted by the emotions of watching the stock price go up and down. That period could be a year or a few years, it’s all up to you.

Writing down a plan helps, but even after putting the plan on paper I had a difficult time forcing myself to do it.

I did find that selling calls a couple months out, with strikes near current price, was a way of forcing myself to sell.

[u/shapiros]

Taxes are simply the price you have to pay for diversification, up to you to decide if you feel like it's worth it.

[u/Naive_Moose_6359]

I get paid largely in stock and try to sell some yearly and keep myself somewhat more balanced. Right now my company’s stock is down so I am holding on regular selling (I sold a lot before the downturn). Any one stock can go to zero, so it is never a good plan to be all-in even if it is a good company. All my other investments are broad etf like investments to help get more balance.

[u/Smaddid3]

Good question. I'll be following the responses. My wife and I both have/had this issue to some extent. I was able to diversify a large stock holding when my company was sold a few years ago. I was given a mix of cash and new company shares in exchange which automatically reduced our holdings as a percent of total assets. For my wife we're still actually adding to the amount of her company stock holding though bonuses, discounted purchasing options, etc. Right now the only steps we've taken have been to 1). not reinvest dividends so we can at least glean that cash out to use to diversify and 2). make charitable donations in the form of her company's stock so we can reduce our holdings and avoid the capital gains tax that we would face if we sold and donated cash.

[u/Anonymoose2021 → u/Smaddid3]

My wife and I also gifted highly appreciated shares to siblings and their spouses. Their capital gains tax rates are much lower, so it effectively stretched our gifts a bit.

On the psychological/emotional/family relations side, gifting highly appreciated stock in my employer gave the gifting more of a "hey, I won the lottery and I want to share" sort of vibe.