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:
- Do you need the money?
- 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.