Every investor dreams of buying early into a stock that produces life-changing gains. But catching a wave like that can lead to some complex issues, too. Take Netflix (NASDAQ:NFLX), for example. It's a 100-plus bagger over the past decade, so if you -- like the questioner in this segment of the Motley Fool Answers podcast -- have been buying and rebuying it steadily over the years, you've probably got some serious capital gains waiting to be harvested from your portfolio. But if a single stock, even one as good as Netflix, makes up 40% to 50% of your holdings, it can test your risk tolerance.
Hosts Alison Southwick and Robert Brokamp, along with Buck Hartzell, director of investor learning and operations at The Motley Fool, discuss what they suggest for this lucky listener and his unbalanced allocation.
A full transcript follows the video.
This video was recorded on Oct. 30, 2018.
Alison Southwick: The next question comes from Dr. YL. "My biggest holding is Netflix, which became 40%-50% in my main portfolio. This is a taxable account. The recent pullback in the stock's price hurt this account substantially. Since I started investing, I've made nearly 200 buy orders and fewer than 10 sell orders. Overall I'm very happy with this Fool approach of buying, holding, and not selling, but maybe it's time to stream some Netflix into other stocks."
Buck Hartzell: Wow, I like that! First of all, congratulations!
Southwick: It's a nice problem to have!
Hartzell: We generally tell people to buy in thirds, which means whatever your full position is, you take one bite and one-third of that and then two more purchases, so you give yourself some time. You did it in 200s, so that's awesome, and he added to a great stock and he's made a lot of money. So first of all, congratulations for that!
We call it the "sleep well at night" test. Here's the thing. I think Netflix is doing very well. I'm not the expert analyst on covering it, but I think most of their potential is in the rest of the world now, because they've gotten so much penetration here in the U.S. They've shown great progress in being an attractive offering around the world. That's great for Netflix.
But stocks are volatile from time to time, and if a 20%-30% pullback in Netflix impacts your life, and it sounds like the recent pullback was less than that and maybe shook you a little bit, it's fine to sell some of that. I think it's in a taxable account, so you're going to have to pay some taxes, but there's worse things to do than pay taxes. Once in a while we've got to do that. I would say a 10% range I start to get a little bit uncomfortable, maybe. That's a personal thing. Forty and 50%, if you have a 20% drop in that, that hits your portfolio at 10%; it's a pretty big hit.
So I think you're wise to be thinking that maybe this is a little bit uncomfortable and you can take some out. Another great way to do this without paying taxes is if you're currently saving and adding money to your savings is to rebalance with new money by buying other things.
That way you don't have to sell your Netflix. You can just buy some of the other positions that you like and that percentage of your portfolio will naturally go down, unless, of course, the stock does wonderfully well. Those are two options. You can do both of them. Don't add any money to Netflix. You can just add money to other things, and then if you feel like, you can sell it down a little bit.
Robert Brokamp: Yes. The stock is down 20% since June. There have been times in Netflix's history where it's been down more than 70%.
Brokamp: Yes, so it's definitely a concern I would have. The tax consequences are unfortunate, or fortunate. It's always better to pay capital gains taxes than to take capital losses. But if you have made multiple purchases over your history of holding it, you can determine which shares you're selling, and choose the cost basis that is best for your situation.
To be quite honest, given that tax rates are pretty low, not knowing your particular situation, it might be a good time to take the big gain now if you expect to be in a higher tax bracket in the future or if you expect tax rates to go up in the future to find some way to pay for Social Security and Medicare and all that stuff. I'm not saying that you should necessarily choose the highest-basis shares. You might want to choose the lowest-basis shares and bite that bullet today. It depends on your tax situation, but basically you do have a little bit of control over that.
Hartzell: And to the extent that if you do sell some of that, you can look through your portfolio for some offsetting losses to cancel out some of those gains and balance them out. I don't know if you have that or not, but that's always a good thing to do at the end of every year, anyhow. Some tax-loss selling. You can buy them back in...
Brokamp: Thirty days.
Hartzell: ... plus 30 days and do that if you want but, anyhow, that's something else to consider.
Alison Southwick has no position in any of the stocks mentioned. Buck Hartzell has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.