Risk Tolerance and Holding Individual Stocks: Part 4 – Tax Deferral and Personal Motivations

Castlepoint Blog: Adam Lee, Behavioral Finance, Client & Planner Attitudes, Values & Biases, Investment Planning, Investment Risk, Psychology of Financial Planning, The Point
July 12, 2023

So far, in Part 1, Part 2, and Part 3 of our “Risk Tolerance and Holding Individual Stocks” series, we’ve talked about the risks and benefits of holding individual stocks. Finally, in Part 4, we come to the end of our list of considerations in holding individual stocks.

Delaying Taxes

Even if there doesn’t seem to be an opportunity to pay a lower tax rate in the future, there is still a value to delaying a tax bill. You can think of it like an interest-free loan from the government. As long as that portion of gain that is earmarked for “taxes” sits in your account, you can earn interest or investment returns on that money. This tax deferral becomes more compelling as the potential tax bill, relative to the size of the asset in question, becomes larger.

For example, say you purchased an investment for $10, and it’s now worth $1,010. You’re paying the top capital gains rate of 20%. If you sell, you’ll owe $200 in taxes right now, or almost 20% of the value of the position. That may be more than you should be willing to pay to redeploy that $1,010 into a “better” investment.

On the other hand, what if you purchased an investment for $990, and it’s now worth $1,000? At that same rate, you’d only need to pay $2 in taxes to redeploy that asset; such a small amount that it may not be a major consideration.

In the most extreme case, if you defer recognition of those gains until you pass away, taxes may be able to be avoided entirely by your heirs.

Principle #7: We should always consider the size of any existing gains relative to the value of the asset and evaluate if the value of delaying taxes is large enough to justify continuing to hold some or all of the asset.  Depending on the magnitude of wealth relative to future spending plans, thinking early on about estate planning may allow total avoidance of taxes. 

Holding Because You Want To

As investment advisors, we can sometimes become too narrowly focused on the financial aspects of decisions. After all, clients do not invite us to evaluate every decision they make through a financial lens. While it is true that playing blackjack is statistically a negative-expected-value proposition, I do not desperately try to talk clients out of trips to Vegas. Why? Because most people have non-monetary reasons for going to Las Vegas: namely, having fun.

For our clients, financial assets are there to help them live abundant lives. And, while we don’t proactively recommend holding financial assets for non-monetary reasons, we understand that those reasons may exist. Maybe you feel an obligation to hold on to some of the stock of the company that gave you an outstanding career opportunity. Maybe you are more motivated to hit your financial goals by holding some stock in a company you personally like.

Whatever the reason, your investments are there to serve you, not the other way around.

Principle #8: No one makes every single life decision through the lens of financial optimization. When it comes to holding individual stock positions, we should always seek to understand individualized risks and how those may impact your goals. But sometimes you may decide continuing to hold some or all of an individual stock position is still worth it.



The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Adam Lee, CPA at Castlepoint Wealth Advisors

Adam Lee, CFA®

Partner & CIO

Adam is a Portfolio Manager for Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He refines and implements the firm’s investment philosophies and strategies to ensure each and every client portfolio is efficiently and effectively driving progress toward clients’ goals. He also provides planning support on specialized illiquid client investments, or other unique financial circumstances.

Read more Adam Lee’s blog posts and articles.