Does Apple’s board know something? Apple has just announced that it cut CEO Tim Cook’s pay by over 50%

Here are five reasons for clients to consider diversifying any Apple holding greater than about 1% of the portfolio.

“Return-Free Risk”: This is the opposite of the risk-free return we hear about. As you know, having a large percentage of a portfolio invested in a single stock increases risk. It adds risk, but doesn’t add expected return. (In fact, it reduces expected return. Ask about our webinar for a full explanation.)

Economic Cycles: Apple, like many technology companies, is exposed to the business cycle. In a recession, technology companies tend to underperform the broader market.

Valuation: Apple has reached a high valuation and its growth rate is slowing down. The P/E ratio is considered high, which means that the stock is overvalued, and it might be a good time to sell.

Regular Portfolio Review: Many advisors approach the issue as part of a portfolio review. If Apple, or any other stock, is significantly overweight, it makes sense to sell the Apple, or other company, and diversify.

Historical performance of other huge companies: As history has shown, even the most successful companies can experience significant stock drops. Recent examples include:

Boeing (stock drop of 52% in 2019, and worse in 2020)

General Electric (stock drop of 58% in 2018, and worse in 2020)

Intel (stock drop of 57% in 2000)

Cisco Systems (stock drop of 78% in 2000-2002)

Microsoft (stock drop of 78% in 2000-2003)

Enron (stock drop of 85% in 2001, and then to zero)

Lehman Brothers (stock drop of 95% in 2008, and then to zero)

How to Avoid Tax on the Sale

Most large gains would result in large taxes if the stock were sold. If you have clients with big gains, chances are one excuse they have for not diversifying is the reluctance to pay big capital gains taxes.

For these clients, a 664 Stock Diversification Trust could be their best option.

Here’s how it works. A stock owner contributes stock to the trust, tax-free. The trust then sells the stock, also tax-free. In fact, the trust is tax-exempt, and you can use it as a tax-deferred investment vehicle. Your clients only pays tax when they receive income from the trust.

If you think a 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor.

You may also be interested in an upcoming webinar on concentrated holdings, where we discuss the best ways to advise clients with highly concentrated stock positions. To learn when the next webinar is, and register for it, use this form on our website.