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Imagine checking a long-forgotten account and discovering it’s worth multiple millions of dollars. That’s what happened to Sarah, a 50-year-old mom from Seattle, recently.
Sarah, who says she’s been homeschooling for 20 years, happened to check her employee benefits account from a tech giant where she used to work.
The account had gone from barely worth anything to roughly $18 million at current market price, she told Dave Ramsey in an episode of The Ramsey Show. Although she didn’t reveal which company it was, some online commenters speculated that it could be Nvidia, the tech giant that has surged tremendously over the past two years.
Regardless, this sudden multimillionaire says she has “no idea” what to do with her unexpected windfall. Ramsey offered some advice.
Diversify and withdraw in a tax-conscious way
Having much of your net worth tied up in a single stock is “scary and unwise,” says Ramsey. He recommends offloading some of the shares and investing her money elsewhere. However, given the magnitude of the fortune, selling even a fraction of the account would likely push Sarah into the top tax bracket.
According to the Internal Revenue Service, the highest possible capital gains tax rate for someone in the highest tax bracket is 20%, making that the maximum (federal) tax bill Sarah would face. Depending on where you live, you may also face state taxes on your capital gains. For Sarah, in Washington State, that’s another 7%.
He suggests speaking with an expert tax planner or investment adviser to minimize the tax bill. However, he insists on diversifying away from a single stock as soon as possible. “If I’m you, even if it costs me some money I would rather have the safety than I would the extra 20%,” Ramsey told her.
Consulting financial planners can help you optimize your portfolio so that your net worth isn’t dependent on just one stock.
You can find fiduciary financial advisors near you through Advisor.com. With no fees to get started, Advisor.com matches you with FINRA/SEC registered advisors best suited for your needs.
From there, you can book a free, no-obligation consultation with your preferred advisor.
They can help you build a diversified portfolio that meets your financial goals without taking on too much risk. Plus, working with a financial advisor might result in better returns. According to research from Vanguard, those who worked with fiduciary experts saw 3% higher net returns on average than those who didn’t.
Besides diversification, Sarah’s story offers another lesson for regular investors: the value of longer time horizons.
Time in the market is better than timing the market
“Time in the market beats timing the market," is a commonly repeated axiom in the financial industry. It’s based on evidence that most investors struggle to find the right stock, at the time, at the right price. Instead, a longer time horizon allows a basket of high-quality investments to compound over time and deliver returns.
Legendary investor Warren Buffett once said that timing the market was “both impossible and stupid.” Instead, in a 2015 interview with The Street, he said “the point is to buy something you like at a price you like, and then hold it for 20 years. You should not look at it day to day.”
Many might choose to take a page out of Sarah’s book and “buy and forget” high-quality stocks, preferably for several decades. But in case of a market downturn, they’ll risk losing millions.
Instead, investing regularly in low-cost index funds can help accumulate wealth over time.
According to the Official Data Foundation, if you invested $10,000 in the S&P 500 in 2004, it would be worth $71,640 by November 2024 – which shows the power of compound growth over a long-term investing horizon.
With Acorns, you can invest spare change from everyday purchases into a smart portfolio of ETFs.
Here’s how it works — when you buy a coffee for $4.25, Acorns will automatically round up the purchase to $5 and invest the 75-cent difference into a diversified portfolio.
Just $2.75 worth of daily round-ups total over $1,000 in a year — and that’s before it earns money in the market. The S&P 500 index has delivered an average annual return of over 10% since 1957. Assuming a similar rate of return over the next 20 years, your net balance would be around $57,275.
You can get a $20 bonus investment when you sign up with Acorns.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
