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My grandparents have been buying me shares of Home Depot stock for years, and these shares were transferred to me once I graduated college. Currently I have 62 shares of HD, and 4 shares of JNJ (which I purchased myself). This is obviously pretty lop-sided and not very well-diversified. I'd like to do my research and pick some stocks myself, but probably won't have a ton of time to do so, so I was considering ETFs.

Should I sell half (or some other %) of the HD shares and start purchasing other stocks/ETFs? Or should I just sit on my HD shares and slowly build up the rest of my portfolio so that HD isn't such a large % of it? I'm with TradeKing, so the trade fees are pretty low at $5.

I know that this is ultimately my choice, but I figure that inheriting shares is a common scenario, so I was wondering what the smartest move would be.

  • How many years are we talking here? More to the point, what is your cost basis in the stock (i.e., how much capital gain would you realize by selling it), and is it in a taxable account? – BrenBarn Jan 18 '17 at 20:05
  • I added country tag based on the location listed in your profile, please correct if needed. – BrenBarn Jan 18 '17 at 20:16
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As you note, your question is inherently opinion-based. That said, if I were in your situation I would sell the stock all at once and buy whatever it is you want to buy (hopefully some index ETF or mutual fund).

According to what I see, the current value of the HD stock is about $8500 and the JNJ stock is worth less than $500. With a total investment of less than $10,000, any gain you are likely to miss by liquidating now is not going to be huge in absolute terms.

This is doubly true since you were given the stock, so you have no specific reason to believe it will do well at all. If you had picked it yourself based on careful analysis, it could be worth keeping if you "believed in yourself" (or even if you just wanted to test your acumen), but as it is the stock is essentially random. Even if you want to pursue an aggressive allocation, it doesn't make sense to allocate everything to one stock for no reason. If you were going to put everything in one stock, you'd want it to be a stock you had analyzed and picked. (I still think it would be a bad idea, but at least it would be a more defensible idea.)

So I would say the risk of your lopsided allocation (just two companies, with more than 90% of the value in just one) outweighs any risk of missing out on a gain. If news breaks tomorrow that the CEO of Home Depot has been embezzling (or if Trump decides to go on the Twitter warpath for some reason), your investment could disappear.

Another common way to think about it is: if you had $9000 today to buy stocks with, would you buy $8500 worth of HD and $500 worth of JNJ? If not, it probably doesn't make sense to hold them just because you happen to have them.

The only potential exception to my advice above would be tax considerations. You didn't mention what your basis in the stock is. Looking at historical prices, it looks like if all the stock was 20 years old you'd have a gain of about $8000, and if all of it was 10 years old you'd have a gain of about $6000. If your tax situation is such that selling all the stock at once would push you into a higher tax bracket, it might make sense to sell only enough to fit into your current bracket, and sell the rest next year. However, I think this situation is unlikely because: A) since the stock has been held for a long time, most of the gains will be at the lower long-term rate; B) if you have solid income, you can probably afford the tax; and C) if you don't have solid income, your long-term capital gains rate will likely be zero.

  • While the tax tail should never wag the investing dog, you make a good point. Separate from allocation, if OP is in a zero cap gain situation, the $20 to sell/buy the shares and bump up the basis is worth it. – JTP - Apologise to Monica Jan 18 '17 at 23:21
  • How would I determine the basis? I have 62.313 shares, but they were purchased slowly over the course of probably 10-15 years, and some of those shares are the result of re-invested dividends. Would I have to figure out the gain per share if some were purchased at $60, some at $70, etc.? – Jackmerius Tacktheritrix Jan 19 '17 at 7:21
  • @JackmeriusTacktheritrix: You would, yes. Depending on how the stocks were transferred to you this could be tricky. You could check with your brokerage to see if they have the cost basis info; otherwise you might have to track it yourself based on records of when the shares were bought (which hopefully you have). In the worst case, the entire sale price would be classified as a capital gain. But if the shares were purchased 10 years ago or more, it's likely most of their value is a gain anyway (HD has doubled in value over roughly the past 4 years), so that might not be a big deal. – BrenBarn Jan 19 '17 at 7:34
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Personally I'm not a huge fan of rebalancing within an asset class. I would vote for leaving the HD shares alone and buying other assets until you get to the portfolio you want. Frequent buying and selling incurs costs and possible tax consequences that can really hurt your returns.

  • I would say not selling if the stock is freefalling will really hurt your returns. – Victor Jan 17 '17 at 22:16
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    @Victor by the time you notice the stock is in free fall, most of the damage is already done. This is the most common way that people buy high and sell low. For solid companies, a big drop is usually a drop in the overall market and is a buying opportunity. – zeta-band Jan 17 '17 at 22:42
  • So when Enron went to oblivion the whole market was going there as well? There are plenty of warning signs when a stock is about to drop considerably in price, and there were plenty of signs warning investors to get out of Enron before it started freefalling. If you don't understand price action, you can't read a chart and if you don't have a plan, then yes you will just end up panicking and sell when it is already too late. – Victor Jan 17 '17 at 23:06
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I would not sell unless the stock is starting to fall in price.

If you are a long term investor you can review the weekly chart on a weekly basis to determine if the stock is still up-trending.

Regarding HD below is a weekly chart for the last 4 years:

HD Weekly Chart

Basically if the price is making Higher Highs (HH) and Higher Lows (HL) it is up-trending. If it starts to make Lower Lows (LL) followed by Lower Highs (LH) then the uptrend is over and the stock could be entering a downtrend.

With HD, the price has been up-trending but seems to now be hitting some headwinds. It has been making some HHs followed by some HLs throughout the last 2 years. It did make a LL in late August 2015 but then recovered nicely to make a new HH, so the uptrend was not broken.

In early November 2016 it made another LL but this time it seems to be followed by a LH in mid-December 2016. This could be clear evidence that the uptrend may be ending. The final confirmation would be if the price drops below the early November low of $119.20 (the orange line). If price drops below this price it would be confirmation that the uptrend is over and this should be the point at which you should sell your HD shares. You could place an automatic stop loss order just below $119.20 so that you don't even need to monitor the stock frequently.

Another indication that the uptrend may be in trouble is the divergence between the HHs of the price and the peaks of a momentum indicator (in this case the MACD). The two sloping red lines show that the price made HHs in April and August 2016 whilst the momentum indicator made LHs at these peaks in the price. As the lines are sloping in different directions it is demonstrating negative divergence, which means that the momentum of the uptrend is slowing down and can act as an early warning system to be more cautious in the near future.

So the question you could be asking is when is a good time to sell out of HD (or at least some of your HD to rebalance)? Why sell something that is still increasing in price? Only sell if you can determine that the price will not be increasing anymore in the near to medium term.

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    I disagree. Your analysis makes sense insofar as technical analysis makes any sense. But with a relatively small investment that is severely undiversified, I would say there is no real reason to nickel and dime things by trying to buy at the absolute highest point. The stock seems to be doing fine; take the gains and buy something that makes more sense. – BrenBarn Jan 18 '17 at 20:18
  • @BrenBarn - the whole point of the exercise is to learn when would be a good time to buy or sell an investment. The objective is not to buy at the absolute bottom point or sell at the absolute highest point, but to buy or sell when the market indicates that conditions are changing and prices are starting to climb or drop. If the stock is rising then why not leave it. I thought the whole purpose of diversifying was to reduce the risk of individual investments falling - but if this stock is doing fine and still rising why sell it just to diverify into other stocks which might be falling? – Victor Jan 25 '17 at 22:52
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This depends completely on your investing goals. Typically when saving for retirement younger investors aim for a more volatile and aggressive portfolio but diversify their portfolio with more cautious stocks/bonds as they near retirement. In other words, the volatility that owning a single stock brings may be in line with your goals if you can shoulder the risk.

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