I wrote this blog post to help those of you who are reaching retirement age and own a lot of individual stocks in your brokerage account, and you are not sure what to do with them.
Not knowing what to do, not having a strategy, can be paralyzing and you may be unable to sell anything or move your accounts. You are likely worried about the capital gains taxes you will trigger if you sell those stocks.
People usually end up owning a lot of individual stocks in two situations. The first is a DIY investor who has bought individual stocks over the years and never sold any.
I recently met with a gentleman who listened to the Motley Fool podcast and subscribed to their newsletter for the past 20 years. When the Motley Fool service recommended a stock, he bought it. Now he is looking to retire next year, and he has a portfolio of over 100 individual stocks.
The other situation where someone might end up with lots of stocks in their brokerage account is someone with an AUM financial advisor. An AUM advisor is someone who charges a percentage of the account to manage it. They often buy and sell individual stocks to make it look like they are doing something worthy of the high fees they charge.
I talked with a woman last month who was in this situation. Her accounts are at Morgan Stanley, and she is paying her current advisor over $40,000 per year to manage her accounts. (1% of $4 million is $40,000.) She would like to move the account to Schwab and manage it herself, saving herself $40,000/year in retirement.
The list of stocks on the right is from her account. You can see she owns many of the same companies that are in the index (Apple, Amazon ,Google, etc.).
Looking at your own portfolio with all these individual stocks may stop you from taking control of your own account because it looks complicated.
Your Own Personal ETF Concept
In a brokerage account with many stocks, you have essentially created your own personal ETF. If you think about your account with many stocks as a whole, it is like an ETF where you can see all the current holdings.
What is an index fund? An index fund owns a sampling of the market that targets certain characteristics. It may be the largest 500 stocks, it may be value stocks, small-caps, or many other characteristics.
As an hourly financial planner, I have software that I can enter your holdings into, and it enables me to compare your basket of stocks to the index. The following graphic shows a client’s portfolio.
You can see he owns more bank stocks and therefore fewer tech and other stocks than the index.
Self-management In Retirement
If you want to self-manage an account like this in retirement, you do not need to actively trade this account like your financial advisor was doing.
Index funds are not traded daily. They are rebalanced quarterly. I don’t even think you need to adjust quarterly. Making a selling priority list once per year is enough.
As a retiree, you will be withdrawing from your account by selling off stocks most years. You can sell off whichever stocks will move your account towards matching the index. In other words, sell the stocks that are most out of line with the index, as needed.
The goal for my client I mentioned earlier would be to prioritize selling enough bank stocks to cover his living expenses in the coming years plus a bit extra to use to buy a technology ETF. That way, over time, he moves towards matching the index. Also, his portfolio gets simplified as he sells individual stocks.
He doesn’t need to sell all at once to match the index immediately because the stocks he owns are good, quality companies.
The situation of owning a long list of individual stocks is really not as complicated as it first appears.
If you are someone who owns many individual stocks, then I hope this concept, that you own your own personal ETF, will help you realize that you can manage your own account and that it is probably not as big an issue as you think.