Disney Stock Dilemma: How Much Is Too Much?
A few years back, I met with a prospective client who was referred to me by a current client. She had worked at Disney for a long time and hadn’t put much thought into her 401 (k) investment allocation. Her reasoning was simple. “I work for Disney, I think the company is good, so I’ll just buy the company stock.”
Over her 35-year career, she accumulated a significant amount of money in her 401 (k), all of it in Disney stock. Beyond that, she also participated in the employee stock purchase plan, which was available to employees before the early 2000s, when the company stopped offering it. This plan allowed employees to buy Disney stock outside of their 401 (k) in an after-tax account, with a company discount.
The Result?
She ended up with a tremendous amount of Disney stock to her name. While the company performed well over that time frame and she certainly made money, it created a concerning situation. When we met, Disney stock was trading at around $150-$160 per share, and we discussed the risks of having so much of her wealth tied to a single stock.
Despite our conversation about diversification, she was reluctant to sell her Disney stock. She had done well with it and believed it would continue to rise. Initially, she appeared right – the stock did go higher after our meeting. However, not long after that, it dropped significantly, falling by more than half from its highest point. The stock has struggled to recover to its previous levels since then.
Understanding Disney Stock Investment Risks in Your Portfolio
This illustrates the very real risks that come with any individual stock. With individual stocks, you typically have the potential for great reward. But, you’re also taking on substantial risk – including the possibility of losing everything.
While I certainly don’t wish anything negative for Disney, we’ve seen many once-prominent companies go completely bankrupt:
- Lehman Brothers
- Blockbuster
- Kodak
- Toys R Us
These were all major companies that no longer exist.
That’s a risk we must consider when too much of our wealth is concentrated in a single company’s stock.
Determining How Much is Too Much
The general rule of thumb is that about 10% of your investable assets is the maximum amount you should have in any single stock investment. This guideline differs from investing in funds. For example, if you invest in a large-cap stock fund that contains 400-500 different stocks, you’re already diversified within that investment.
However, when you put more than 10% of your investments into one stock, you expose yourself not just to general market risk, but also to all the risks specific to that one business, such as:
- Leadership decisions
- Financial choices
- Sales performance
- Competitive threats
This significantly increases your overall risk.
While 10% is a good starting point, each person has different risk tolerances and financial situations. Understanding your complete financial picture is essential when making these decisions.
Strategies for Managing Your Disney Stock
If you’ve found yourself with too much Disney stock – whether through 401 (k) contributions, an employee stock purchase plan, or bonuses received in company stock that you’ve held onto – there are several strategies you can use to manage the risk and mitigate potential negatives.
Sell the stock within your 401 (k)
If the stock is in your 401 (k), you can sell it without any immediate tax ramifications. However, depending on how long you’ve held it and how close you are to retirement, there may be benefits to keeping some of the stock.
This is especially true if you don’t have many assets outside your 401 (k), as there are special tax rules for Disney stock in the 401 (k) plan that can be beneficial once you retire. These rules allow for some alternative sources of taxable income through that Disney stock.
Use protective strategies for stock held outside your 401 (k)
For Disney stock held outside your 401 (k), such as Disney LTI or stock purchase plans, you have additional options:
- Options strategies: You can use the dividend income to buy an option, which provides protection on the downside. If the stock drops in value, this gives you a floor on potential losses.
- Stop orders: You can place a stop order with your custodian. For example, if Disney is trading at $115 per share and you don’t want to lose more than 10%, you could set a stop order at $100. This automatically triggers a sell order if the stock falls to that price.
It’s important to note that a stop order doesn’t guarantee you’ll get exactly that price. It simply triggers a market sell order, so there needs to be a buyer willing to purchase at that price.
Using Disney Stock for Charitable Giving
A third strategy involves using your stock for charitable giving. If you donate to a church, charity, temple, or other nonprofit organizations, you can gift some of your Disney stock instead of writing a check.
This approach allows the organization to receive the full dollar amount. For example, if you planned to donate $1,000 to your church, you could instead give them $1,000 worth of Disney stock. They can sell it and realize any gains, while you still get the tax deduction for the full $1,000.
Be aware that there are limits on how much you can give in one year and still claim a deduction. Make sure you understand those limitations.
The Importance of Stock Diversification for Long-Term Security
When considering whether to diversify away from a concentrated position in Disney stock, tax implications often become a concern. While being tax-efficient is important, taxes shouldn’t be the sole factor in your investment decisions.
Let’s look at an example: If you have $10,000 of Disney stock that you originally paid $5,000 for, the long-term capital gains tax (which can be up to 20%) would mean roughly $1,000 in taxes when selling. That’s a real cost to consider.
However, as we’ve seen with Disney’s stock performance in recent years, the stock could potentially drop 40%, 50%, or even 60%. In that scenario, you might avoid paying the $1,000 in taxes, but you could lose significantly more than that amount in value.
This is why it’s important to think about your investment strategy first and taxes second. While no one wants to pay unnecessary taxes, protecting your retirement security through proper diversification is typically the higher priority.
Taking Action
If you’ve determined that you have too much Disney stock in your portfolio, consider these steps:
- Calculate what percentage of your total investments is in Disney stock
- Develop a plan to gradually reduce your exposure if it exceeds your risk tolerance
- Consult with a financial advisor about tax-efficient strategies for diversification
- Consider using some of your appreciated stock for charitable giving
- Implement protective strategies for any stock you decide to keep
Understanding Disney stock investment risks is crucial for long-term financial security. While company loyalty is admirable, your retirement security requires thoughtful diversification and risk management.
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