Case Studies
Case Study: Anna
“People get attached to certain stocks when they have performed exceedingly well. Sometimes they are reluctant to sell investments, partly due to their gratitude and partly because they think they might be leaving some upside potential behind if they do. If she had not diversified when she did, it is very likely that she could be broke today. We use a very disciplined balancing approach in order to avoid these sorts of catastrophes,” said Phil Stoker, Co-Managing Partner of Stoker Ostler Wealth Advisors.
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A True Client Scenario: Anna (all names has been changed to protect the identity of our clients) came to us in November 1999 as a referral from her brother. Anna, a 60-year-old retired nurse, was divorced with two adult children, one of whom was married with one child.
Anna’s only investment was 27,000 shares of MCI/Worldcom stock worth approximately $2.3 million. Her cost basis in the stock, which she purchased 30 years previously, was $1,000. She was interested in receiving enough income each year to meet her needs and estimated that would mean $40,000. She also wanted to gift money each year to her two children.
Our Solution: Our immediate concern was the need to diversify Anna’s portfolio. She was very reluctant to part with all of the MCI stock, as it had been a good investment for her to that point with a huge run-up in value over the prior two years. We explained to Anna that there was always a chance that the stock could plummet, and therefore she should cash out a majority of her gains and diversify. We discussed various options for diversification including a swap fund like those offered by Goldman Sachs, a Charitable Remainder Trust, or just selling the stock outright and paying the tax.
We approached the diversification plan based on an assumption of “what if the stock went to zero” scenario – that is, if the stock should become worthless in the future, what can she afford to keep of the stock and what does she need to sell to protect her future? We laid out our plan to sell 20,000 shares of MCI stock outright. The price at the time was $90 per share, which turned out to be almost the top. Her shares were worth $1.8 million gross, of which about $400,000 would go to pay the capital gains tax incurred on the sale. This left about $600,000 in MCI/Worldcom stock. The $1.4 million left from the sale was divided between a diversified portfolio of stocks and bonds. We also set up accounts for gifting to her two children.
The Lesson: Never could we have predicted that the MCI/Worldcom stock literally would be worthless in just three years. We did sell all of the stock before the collapse, but at a lower price than the original sale. However, Anna is very happy knowing her assets were protected due to good advice at the time, as well as the continuing rebalancing and monitoring of her portfolio, financial modeling and planning as her circumstances have changed.