Helping to Manage Risk in a Changing World — Part 3:

The Hidden Risks of Cost Basis and Legacy Stocks

Often, some of the most common—and trickiest—risk management decisions come not with new investments, but with stocks that have been in a portfolio for years, even decades. Many families own what we call “legacy stocks”—positions that were purchased long ago and have appreciated significantly over time. These non-IRA holdings often carry sentimental value, not to mention a very low-cost basis.

At first glance, holding onto them seems simple: “Why sell and trigger unnecessary taxes?” But while cost basis and capital gains deserve careful consideration, holding these positions indefinitely can sometimes introduce risks of their own.

The Tax Dilemma

Selling a long-term stock position often creates a taxable gain. Understandably, many investors prefer to defer that bill. But deferral can also lead to concentration risk, where one company—or one sector—comes to dominate the portfolio. If that company or sector stumbles, the impact can be magnified.

When Holding Becomes Risky

Consider a stock that has grown tenfold over several decades. What was once a modest position may now represent a significant portion of your net worth. While it feels good to see that growth, the risk of “all your eggs in one basket” can become very real. Markets change, industries shift, and yesterday’s winners are not guaranteed to be tomorrow’s leaders.

Strategies to Manage Cost Basis and Risk

The good news is, there are ways to address this tension:

• Gradual Trimming: Selling shares over time helps spread out the potential tax impact while steadily reducing concentration risk.

• Charitable Gifting: Donating appreciated stock directly to a charity or donor-advised fund avoids capital gains tax and creates a tax deduction.

• Step-Up in Basis at Death: In some cases, it may make sense to hold highly appreciated positions as part of an estate plan, knowing heirs may benefit from a step-up in basis.

• Strategic Rebalancing: Using gains to reallocate into other sectors or asset classes keeps a portfolio more balanced.

One key element to recognize is that avoiding taxes isn’t the same as avoiding risk. Sometimes, the greater danger is not the tax bill—but the lack of diversification.

At Tanner Wealth, we help clients work with their tax professional to navigate this delicate balance: honoring the value of legacy positions while also helping to protect portfolios from the silent risks they can carry.

Next week, we’ll wrap up our series by looking at the other side of the equation—how being too conservative can sometimes be its own kind of risk.

By John Tanner, VP | Regional Leader | Wealth AdvisorFI Advisors, Inc.913 N PATTERSON STVALDOSTA, GA 31601 229-232-8211

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