The number of shares you have in your 401(k) isn't in and of itself a reason to hold onto your stock. If you have a lot of stock and it fits your investment goals, holding onto it could be the best choice. On the other hand, if that stock doesn't meet your goals, selling it and buying a different investment could be the best choice.
Cost of Selling
When you sell stock in a taxable account, that sale is subject to capital gains tax if you sell for a profit. This means that if you sell one stock and turn around and buy another one, you won't have as much money working for you in the second investment because the Internal Revenue Service takes its cut of your profits. In a 401(k) account, your transactions are generally tax free. You pay taxes when you take money out of the account, but not when you shuffle money around inside the account. For that reason, taxes aren't a reason to avoid selling stock inside your account.
Value of Stock Diversification
If you have a large number of shares of the same stock in your 401(k) account, such as can happen with company stock, you may choose to sell to diversify your risk. Taking an extreme example, if you have 100 percent of your 401(k)'s balance in a company and that company fails, you could lose everything. While this is generally a remote risk, it was a real risk for people who held stock in companies like Enron, Lehman Brothers or General Motors, all of which went bankrupt in the first decade of the 21st century.
Alternatives to Stock
Your investment alternatives vary based on what your 401(k) plan's sponsor allows. Typically, in addition to stocks and stock funds, you will also have the option to buy funds that invest in bonds. Usually, the bond funds will be more conservative but will pay a lower return. Your 401(k) may also offer a stable value fund that guarantees your principal. If you have the ability to choose your own stocks, you may be able to use that feature to buy any asset through the plan's broker, including bonds.
Allocating by Age
One rule of thumb used by investors is to diversify the types of assets you own relative to your age. Some investment advisers recommend subtracting your age from 100 or from 120 to find the percentage of assets in your portfolio that should be in stocks. For instance, if you're 40, you would have between 60 (100 minus 40) and 80 (120 minus 40) percent of your portfolio in stocks. For a 70-year-old, the stock allocation would be between 30 and 50 percent. You can then put the remainder of your portfolio in bonds or cash.
- MarketWatch: How to Calculate Taxes Owed on Stock Sales
- NJ.com: IRA, Roth and 401(k) Equity Trading Is Tax-Free
- Business Insider: The 11 Largest Bankruptcies in American History
- FINRA: Smart 401(k) Investing -- Investing in Your 401(k)
- CNN Money: Ultimate Guide to Retirement -- What's the Best Asset Allocation for My Age?
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