Should You Sell Stock That You Inherit From Your Parents?

The most common question that I have received through the contact form of this site is from beginning investors that suddenly find themselves in the position of receiving a sum of money that creates a need to learn how to invest. Sometimes, this comes in the form of stock investments inherited from a parent, grandparent, or some other benevolent actor.

A lot of times, this creates a situation that has an emotional component that complicates the otherwise straight-forward decision-making process of traditional asset allocation decisions.

Sometimes, if the stock in question has been successful for many years, you might start to believe that it has magical wealth-making powers (if the stock has declined 50% over the past fifteen years, it’s doubtful that you’d be wrestling with the question of whether to sell it now). You might have no idea what the heck United Technologies does, but if you see that the $10,000 investment that your mom made in 1984 is worth $588,000 now and would be sending you $3,000 in cash dividends every ninety days. Even if you have no idea what it does, you can be emotionally swayed by its excellent historical performance and might be inclined to adopt the “if it ain’t broke, don’t fix it.”

The other thing that is common is for you to inherit stock of your parent’s employer that had been acquired over time.Whether it be due to stock grants, discounts for buying the employer’s stock through a 401(k), or simply the familiarity and trust that some people have in the companies they work for, there’s a lot of reasons why people end up acquiring a giant slug of their employer’s stock over the course of their lifetime.

This has a very strong emotional element because of the heavy association between the employer’s stock and your mom or dad that might have earned the money while working there. If your dad had worked at Emerson Electric for 35 years and turned a $500 monthly investment into $3.1 million (thanks to a blended average annual growth rate of 13.3% over that time period), then you might view those $19,000 quarterly dividend checks as your father reaching from beyond the grave to continue to assist you financially. You might feel disloyal for breaking the chain and selling because you view that company stock might be considered an extension of your father still existing on this earth. The emotions can be powerful.

In trying to make a determination about what to do with the stock, there are two initial questions worth asking:

  1. Do you need the money?
  2. Would you have an desire to be a part owner in this company of your own volition, if it was not gifted to you?

If you don’t need the money, then it’s not really a big deal to sweat the details of this topic. If you have a $3 million portfolio and you inherit $50,000 worth of stock, there’s no real harm in letting the emotions rule the day; your standard of living won’t be downgraded if the company goes bankrupt. If you’re at peace with that worst-case scenario and could do just fine without it, then you can do whatever makes you happy without needing to engage in heavy analysis of the situation.

The only time this question becomes difficult is if (1) you need to depend on the money to maintain your standard of living, and (2) you are emotionally connected to the stock.

If those two conditions exist, then you need to step back and ask yourself the question: Why do you think the person gave you the gift of a substantial block of stock? The answer, most likely, is because they wanted to aid in giving you long-term security. The particular stock that they gave was just a means of accomplishing it, but you need to dissociate their specific actions (i.e. the stock they gave you) from their specific interests (giving you long-term economic security).

When you can start to think about the issue in those terms, you ought to be willing to open up: it’s not $500,000 of Anheuser-Busch stock that your relative wanted you to have, but rather, it’s the economic security that $15,000 provides which is their true objective most likely.

With concentrated wealth, you are one Wachovia flip-of-the-coin away from comfortable middle class to destitute poverty. Do you really think your relative wanted you to take on that kind of risk with the money? Even if they did, it’s your money now, and it’s your job to recognize that money is a tool that is to be used to give you the kind of life that you want.

If you diversify that $500,000 (or whatever the amount turns out to be) into twenty or so dividend stocks that have been raising their dividends for 25+ years straight, you are incredibly stacking the odds in your favor of seeing a $15,000 income grow each year. Don’t you think that’s the kind of result that your relative wanted? And if not, it’s your money now—doesn’t a strategy that guarantees the continuation of wealth production and growing dividends make a lot more sense than following a misguided strategy of sticking with one stock out of loyalty?

If you choose to sell inherited stock, don’t think of it as being “disloyal” to your family member that gave it to you. Instead, think of it as “respecting” the money they gave to you by being a wise steward of it. If the company goes bankrupt, you risk seeing all of your dad’s (or mom’s, or whatever it may be) sacrifices and delayed gratification turn into nothing. Is that the outcome you want? If not, take it upon yourself to be a wise steward of the capital, and divert it into ownership stakes in the most dominant companies in the world, so that way you can ensure that the gift of your parents is truly a gift that keeps on giving.

Originally posted 2014-01-30 08:17:07.

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8 thoughts on “Should You Sell Stock That You Inherit From Your Parents?

  1. Clarkaroo says:

    scchan_2009 Clarkaroo Thanks scchan! You made me laugh. I finally did sell all the tech stocks in my self-directed 403b and returned to the offered bluechip growth fund, and left it alone. They were not Intel, Cisco or Microsoft! Now that I'm retired I should transfer it to a brokerage. I'm considering splitting it into Walgreens and Walmart.

    When BP climbs to appx 65 I can sell it with no capital gain. I'd sell about half the position and use the money to diversify away from energy. Thanks again.

  2. scchan_2009 says:

    My father did quite a bit of both long term investments and speculations (one time I caught him doing stuff with his margin account – laugh). He did gave me some money when I first went to college close to 2 decades ago, and told me that I should learn how to manage it myself – either spend or invest it, but he won’t dictate to do with it.

    Holding onto inherited stock or your company own stock is indeed quite dangerous, imo. Enron employees who invested in his/her company were wiped out completely. You will think you are the best “insider” working for Enron. No, you are not. Well, I will not suggest SHORTING your own company stock because you may have broken the law (laugh). 
    Investing is buying companies. It is business. Ideally, investing and owning company with emotional attachments are not sound business, but some emotional attachments are probably unavoidable. Following Peter Lynch’s local knowledge model that a company that has sold you good products that you like may be a worthwhile investment candidate (good products = good business); but Lynch always checked the fundamentals. You better have some understanding what is going on – the best way to put it: don’t you let your emotional attachment with the stock to cloud your judgement.

    Just a bit of Warren B story, one of his son sold BH stock to fund his music career, and he (the son) have a good music career with the help with his dad’s money. I am sure Warren is proud of him. Warren’s other son did work with his father, and is a BH director now.

  3. UScott says:

    Clarkarooscchan_2009If I were just starting out (I'm about 10 years into investing, and 3 years into income theory investing) the first stock I'd look into is KO.  Any time I can get shares of KO at a 3% yield point, I add to it.  When it gets there, it usually goes up, if its dipping thats about the bottom point it dips too.

  4. Clarkaroo says:

    Tim, I read all your posts on Seeking Alpha. Let me share a personal example on this subject. When the family trust was finally dissolved and my distribution arrived, these stocks had come to rest on this side of Headline News: BP, AIG, JCPenney. Aww man. It hurts to LOL.

    My father retired from Atlantic Richfield and BP was 2/3 of the portfolio. He invested in companies he knew, and other companies bought them out. AIG had been the second largest holding but now it is what, perhaps 2% of former value? When do AIG warrants become useful? Not all is bad. The smaller Chevron (Texaco) position is now worth about half of our BP. OGE (OkGasElectric) putters along. Which have done best? A few shares each in Huntington Ingalls, Northrop Grumman, and Tenneco. All stocks are direct registered, not in a brokerage. BP dividends are auto-reinvest, the others send cash. I also inherited money, paid off my second mortgage and refinanced at 3.5%.

    The major experience of my personal retirement account is inability to sell my beloved stock picks after the top popped off the tech bubble. My plan is to use $60000 remaining cash to buy DGI stocks, but I can’t decide which ones. The market sure has gone up while I dithered…   Seeking Alpha DGI commentary is important to me. So glad I found it! Thanks mucho for your exposition.

  5. Clarkaroo says:

    Tim, you can use my example in your columns, if you like. My basket of stocks shows how the final two years (plus/minus) has such an outsize effect on portfolio value. This set of equities took a 60+% haircut during the time there was no effective oversight. On the other hand I can’t express how happy I am to receive what I now have! Very grateful, and wanting to become a good steward.

    Thanks for writing this article.

  6. scchan_2009 says:

    ClarkarooI think BP and Chevron are not a bad investment for the long term – so can be say with its peers (Exxon-Mobil, Total, RD Shell, CP, Statoil…). JCP and AIG… without a better word – ouch.

    I think it is prudent not to sell off tech holding after dotcom bubble, unless one holds the dotcoms themselves (imo those companies are worthless to begin with). The dotcoms that survived or the new dotcoms are just as ugly…

    One of the first two stock I bought is Walmart and IBM because I don’t know anything else to buy as I only have limited knowledge about valuations at that time (and I then I go taught myself by picking up B Graham’s book from local book store), so I just go by “You can’t go too wrong with IBM and Walmart”, and both remain my core holding over the years since I start interested in stocks.

  7. scchan_2009 says:

    UScott Clarkarooscchan_2009 imo: Targeting dividend yield is a good pretty strategy, I myself use dollar cost averaging mostly.  
    As for Walgreens and WMT, they both are good. I think the JCP fiasco in the retail arena was fully avoidable and was a self-inflicted disaster – if you dig into my old SA comments, I didn't talk about Bill Ackman nicely (laugh). Both Warren Buffett and Peter Lynch said that they like business even idiots can run. While department stores are reasonably stable business, you can still completely mess it up. Anyway, that is how investment works – one really does not know what holds in the future. Future is uncertain, so best you can do is to manage risk and don't assume too much.

  8. Casey Taylor says:

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