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Ask Dave

Too much risk

Dylan asks Dave what he should do with company stock he was given years ago as a gift. Dave advises him and explains the process.

QUESTION: Dylan has some company stock his grandparents bought for him years ago. He asks Dave if it would be a good idea to cash out the stock and roll it into an IRA.

ANSWER: Technically, you wouldn’t be rolling it into an IRA. You would cash it out and use the money to establish a Roth IRA. And yes, I would do that.

It was very kind of your grandparents to buy you a gift like this. But let’s say you’ve got $10,000 in one company’s stock. Would you buy that stock if you had $10,000 sitting on the table? Most people would say no because there’s too much risk. I wouldn’t advise having the majority of your wealth — the highest percentage of your net worth — tied up in one single company. That’s bad news.

So yes, I would sell that stock and use the money to fund a Roth IRA or multiple Roth IRAs. My wife and I invest our Roth IRA money evenly across four types of mutual funds — growth, growth and income, aggressive growth, and international. I pick mutual funds that have a solid track record of outperforming the S&P 500 for 10 years or longer.

And yes, you can find mutual funds that outperform the S&P 500.