31 Mar Should I keep inherited stocks?
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Q. I inherited some stocks from my dad. Five large companies worth about $50,000. How can I decide if I should keep them or sell them?
A. We don’t know enough about your overall personal and financial situation to say for sure, but we can give you some items to consider.
First, what’s right for you will depend so many issues, including your age, what other investments you may have, your time horizon, whether you’re investing for the long-term or have short-term needs such as college tuition, your investment risk tolerance, whether you have an emergency fund, and so forth.
If you have a large and diversified portfolio in addition to these five stocks, there’s no particular reason to sell them if they’ve performed well and you anticipate that their future prospects are good, said Gene McGovern of McGovern Financial Advisors in Westfield.
But, he said, a portfolio of five stocks, absent any other investments, is risky.
“Not only are you subject to overall stock market risk and volatility, but you’re also subject to the risk that one or more of those companies may go bankrupt or simply not do well — company-specific risk,” McGovern said. “A more-diversified portfolio of stocks and bonds can largely eliminate the company-specific risks while also reducing the market risk of holding only equities.”
If you do decide to sell, the good news is that inherited assets such as your dad’s stocks receive a step-up in basis to fair market value on the date of death, McGovern said. That means you would have little or no taxable gain upon selling the stocks now, assuming you inherited them recently. He said any gains you do incur would be considered long-term capital gains, which are taxed at lower rates than ordinary income.
If you have a short-term need for the money — within the next year or two — you’re better off selling the stocks and investing the money in safer, short-term instruments, such as bank savings accounts, money market funds, certificates of deposit, or other short-term investments such as Treasury bills, he said.
If you’re a longer-term investor, you’re probably still better off selling the five stocks.
You can then invest the proceeds in a low-cost index fund such as an S&P 500 index or total stock market index fund (for stocks) or a balanced portfolio of stocks and bonds (for example, 60/40), McGovern said.
Another option is a target retirement fund.
Any of those choices would substantially increase your diversification and reduce your investment risk, he said.
“On a final note: your dad’s stocks may have sentimental value for you,” McGovern said. “If that’s the case, you may want to retain a small number of each of the shares while investing the rest as described above.”
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