A high net worth means fewer financial obstacles, but it also means you have to ask different questions and deal with new challenges. When people have low net worths, it’s good to focus on career growth and maximizing income.
However, a recent Reddit post highlights how priorities can change once people amass large nest eggs. This post comes from a 49-year-old who has a $7 million portfolio.
He has 64% invested in index funds, 28% invested in Apple (NASDAQ:AAPL), and 8% invested in bonds and money market accounts. The investor is wondering if he should start to scale back or stay the course. He also mentions that growing up from not having a lot has shaped his desire for security.
Does it make sense to scale back a portfolio in this scenario? While it’s best to speak with a financial advisor on these types of matters, I will share my thoughts.
How to Deal with a Big Position
Having 64% of your holdings in the index fund is fine since it’s already diversified. Putting 28% of your holdings into a single stock is a bit risky, and it may make sense to reduce that holding.
However, it’s not good to sell the entire Apple position either, as it will likely trigger a significant capital gain. The Redditor has mentioned that he plans to scale back gradually to minimize the tax impact, but there’s something else he can do.
Apple pays out quarterly dividends, and having more shares allows you to earn more. However, an investor with a large Apple stake may want to receive the dividend as cash instead of additional shares. That way, it’s possible to put Apple’s dividends into other investments, like index funds, instead of buying more Apple stock.
A strong reliance on any individual stock is risky, even if it’s as reliable as Apple. Scaling down may mean trimming this position over time instead of touching the index funds.
What’s the Motivation for Making Extra Money?
Some people have large enough portfolios that they can liquidate into cash and survive by keeping their money in the bank. However, many of these same people stay invested in the markets because they want to grow their portfolios.
It’s important to assess your reasons for making money before deciding to scale back. The Redditor has emphasized wanting financial security, so trimming some of their equities can help them sleep better at night.
However, it may make sense to stay invested if you want to provide multi-generational wealth for your children. Someone who has four children will have very different motivations to grow their portfolio than someone who isn’t raising a family.
The Redditor has $120k/yr in expenses, and that includes two kids in college. Staying invested can result in higher returns, and the Redditor seems to have the financial flexibility to remain long on his investments.
Gradually reducing their holdings can make more sense once both kids graduate college and retirement looks much closer.
Passing the Portfolio to Your Kids
Another option is to keep the portfolio intact with the goal of passing it on to his children. Again, it depends on the investor’s risk tolerance and personal goals, but there are benefits to holding his investments.
First, if he passes away with most of his Apple shares, the children would receive the stepped-up cost basis. That means his children would not have to pay any capital gains taxes on the returns he accrued from his Apple position.
The step-up basis rule also applies to individual stocks, funds, real estate, cryptocurrencies, and other assets. It’s one of the best ways to build generational wealth.
The Redditor will inevitably use some of the funds to cover his own expenses. This post was published in the Chubby FIRE subreddit, so he will have higher monthly expenses than most retirees. However, that currently comes to $120,000/yr, which is doable for him.
Low monthly expenses give him a lot of breathing room for market corrections and volatility. Keeping the portfolio intact can leave his kids with a nice nest egg while allowing him to maintain his current lifestyle.
Top Gaining Stocks
Top Losing Stocks