Question: I am less than three years away from retirement and have 80% of my stock portfolio in a particular stock which has grown about 30% in the last two years. My mortgage is at 4.4% and my 401(k) is about 1/3 of my total assets (the other 2/3 being stock). I am single with a salary between $100,000 and $150,000. I was thinking of paying off my mortgage by selling about a quarter of that particular stock which would include the capital gains and fees. Is it wise to sell stock at this time to payoff the mortgage? I also thought that selling the stock and putting it into the apartment where I live would help diversify my portfolio.
Answer: You have a "single stock" portfolio, which offers the chance of great reward as you have seen over the past two years, but also great risk. A company's stock price can drop 10%, 50% or even 100% as we saw with Enron many years ago, or Bear Stearns more recently.
Clients are often reluctant to sell a single stock, however -"The stock price ALWAYS goes up, and anyway I don't want to pay capital gains."
We work with our clients to determine the risk inherent in their particular company. From that, we derive a schedule of how quickly we should sell off a position. For example, we are working with one client now to sell off 5%/quarter of a substantial position in Amazon (AMZN). On the one hand, we gave up substantial profits from earlier sales over the past three years. On the other hand, the family paid off their mortgage, the children's college funds are already in the bank, and working could become optional in a year or two.
So yes, selling a quarter of your current position is a good idea, but perhaps spreading the sales out over the next three years would also spread out paying the capital gains tax. Again the schedule would depend on the inherent risk in the company. We are less aggressive in reducing another client's position in McDonalds (MCD) (only 5%/year) because we believe that the price risk in McDonalds is substantially less than in Amazon.
Generally, we recommend against investing in real estate (as opposed to real estate investment trusts-REITS) as an investment. People grossly underestimate how hard it is to make money as a non-professional landlord.