Don’t Be Sentimental with Inherited Stocks

Q: My aunt died in 1997 and left me a generous amount of Chevron stock. Partly because she and I were so close, I’ve never felt right about selling it. But given what’s recently happened with the price of oil, and, considering that I’m now retired and the stock makes up a majority of my retirement, what do you think about me liquidating it and moving on?

A: Obviously you could not have predicted that the price of a barrel of oil would plummet by over 50% and cause the value of your holdings to drop as much as it has. But here’s a little tip: the Chevron share price should have been irrelevant to your decision to sell (or hold) in 1997. It should have been irrelevant a year ago (when the price was still high), and it should be irrelevant today.

I’m always a little dismayed when people hold on to a particular stock simply because they inherited it. That’s because when a person receives an inheritance, it’s actually a great time to diversify (or even liquidate), and build a new portfolio.

Whether it’s stocks or real estate, most assets that are transferred upon death enjoy what is known as a “stepped-up basis,” which essentially eliminates any capital gains that would otherwise be due. This enables the person who receives the inheritance to dispose of the possessions with no tax consequences.

So why do so many people hang on to inherited securities? There are a variety of reasons, but here are a few that I regularly see. First, there is a sense of obligation that comes with an inheritance, with the asset serving as a reminder of the person who has passed away. (My own home is filled with items that once belonged to my mother-in-law. A few of these items are valuable, but most are simple, everyday things that have great sentimental worth.)

Second, we tend to believe that if an investment was good enough for a cherished relative, it should be good enough for us. Third, and, most commonly, it’s simply easier to hold on to an inherited stock than it is to make a change.

Whatever reasons you’ve had for keeping these shares (for almost two decades), you have too much of your savings tied up in just one investment. Having all of your eggs in one basket is rarely wise, particularly as we age and no longer have decades left to make up for our mistakes or oversights.

If I were in your shoes, I’d sell enough shares so that Chevron doesn’t comprise more than 5% to 10% of your overall retirement savings. Having more than 10% invested in any one company is typically too much for anyone with a limited time horizon and modest (or even moderate) savings or income.

I’m sure you don’t feel great about selling the stock while the price is down, but try and look at it this way: It’s substantially higher now than when you inherited the shares in 1997. So while it may not be as high as it was a year ago, you’re still way ahead.

If you know that reducing your exposure is the right thing to do, but you’re having trouble pulling the trigger, consider selling half of the shares now and the other portion a year from now. That way, for good or for bad, no matter what happens, you can feel clear about your decision. Simply, if the stock is lower a year from now, you can pat yourself on the back for having had enough foresight to sell only half of your shares. And if the stock is higher a year from now, you can congratulate yourself for having kept half.

Your aunt did something very nice for you. But the circumstances have changed and the value of Chevron stock is not what it once was. I suggest you honor your aunt’s memory (and her foresight) by diversifying your portfolio as soon as possible.

Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit MoneyMatters.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.