Concentrated Stock Positions: Ways to Reduce Single Stock Risk

A single stock can make you rich, but multiple stocks can keep you rich: Strategies to reduce your concentrated positions

 

As the equity markets continue to climb higher, individuals who hold concentrated stock positions may find themselves feeling a bit uneasy, particularly with one position becoming a much more meaningful part of their overall wealth and future financial security. Those who have been fortunate enough to achieve superior returns on a particular stock may feel hesitant to divest a portion of their concentrated position due to tax issues, loss of potential upside opportunity or simply due to sentimental reasons. However, there are certain strategies available to investors to help manage single stock risk. Here are four risk-reduction strategies to explore:

 

 

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Last Minute Tax Tips

As we are getting close to the initial deadline of April 15th, we are sending this note to you about items that may be overlooked when preparing your taxes.

 

1. Retirement Account Funding. If you qualify, make sure your contributions are funded by April 15th. If you have children with earned income you might consider funding a Roth IRA on their behalf.

2. Tax Credits. Make sure that you are claiming all the credits available to you including the Child Tax Credit, the American Opportunity Credit, etc.

3. 529 Contributions. Some states provide a deduction for contributions made to their state-run 529 plans. An example of this is New York and Pennsylvania. Make sure you claim this deduction on your state returns, if available.

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International Markets - Is the sleeping Giant finally awakening?

The international markets have under performed the US markets heavily over the past five years as the US markets have rebounded from our “Great Recession”, and US Monetary policy has pumped liquidity into the markets through three quantitative easing programs. Additionally, Europe struggled with a debt crisis in 2011 that largely held their markets back from their recovery. However, we do believe that we are seeing signs that European Markets are starting to bounce back. 

 

Monetary Policy

Central banks in Europe, Japan, and China have started to copy the US playbook regarding monetary policy and are implementing their own versions of Quantitative Easing. Japan started late last year, China earlier this year, and the European Central Bank announced a program that started this week. While the magnitude of these programs is open for debate, these programs are all designed to stimulate each of their economies.

 

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Oil, Energy, and MLPs – is the worst behind us?

The price of crude oil has rebounded strongly since the end of January after closing down nearly 46% in 2014. Is this the beginning of a new upward trend? Or perhaps it’s just a short-term correction before a further decline? While it has proved difficult to predict short-term and long-term price targets on the oil and energy sector as a whole, we believe that 2014’s energy selloff has provided us with an attractive opportunity in the space. Energy master limited partnerships, or MLPs, are publicly traded corporations that combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. We believe that the energy selloff has provided an attractive entry point into this space.

 

WHY DID OIL PRICES DROP SO LOW? Although there were many factors that affected the price of oil in 2014, there were two key themes that played out – reduced US dependency on foreign oil and OPEC’s decision not to curb oil production. The United States has now become the world’s largest oil producer, which means we now import far less oil than we have in the past. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement this past November to curb global oil production, which continued to send crude prices tumbling.

 

HOW DOES THIS AFFECT MLPs? Energy prices can have a significant effect on upstream MLPs, which are typically engaged in the exploration and production of oil and natural gas. The area that has piqued our interest, however, is in the midstream MLP space which services the energy sector by providing pipelines, storage, refineries, and processing plants to the exploration and production companies.

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Are ROTH IRAs Next?

Our President has made it clear that a redistribution of wealth from the top 1% is his main priority. In his recent State of the Union address, he outlined a number of ways he felt would achieve this goal, one of which dealt with 529 plans. The President's plan was to remove all the tax advantages related to 529 plans (as discussed in Pete’s previous blog). Criticism from the media, financial advisors, concerned parents and members of the House and Senate was swift and harsh. The President stepped back from the 529 proposal and decided that taxing 529 plan growth and withdrawals was not the way to go.

 

Our thought (and one that is popping up more and more in the investment media) is that if the President would go after 529 plans, could Roth IRAs be next. Millions of people use the Roth IRA as a way of shielding future taxes on investments. Millions have converted portions of their IRA accounts into Roth IRAs under the guise of tax-deferred growth, no required minimum distributions and no tax on withdrawals when you do take the money out.

 

The government established the Roth IRA because they wanted tax money now. They were willing to forgo future tax revenue to do this. Now they are seeing the impact of this decision as the value of Roth IRAs increases significantly over time. Could the government decide that this was a mistake and rollback the tax advantages of the Roth? Who knows, but I am sure that any attempt to roll back the Roth IRA benefits would incur the same backlash as the 529 plan proposal.

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