Question: I’m 55 and have 10 years until retirement. I’ve made $2 million on Nvidia stock. What do I do with it now?
Answer: Nvidia (NVDA) has been one of the great success stories of our time.
The company started out as a niche maker of specialized chips for video-game enthusiasts. Today, its chips are powering the artificial intelligence (AI) revolution. Without Nvidia, there wouldn’t be an AI revolution.
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As a result, NVDA stock has been one of the greatest wealth-creating investments in history. Had you invested $6,700 in Nvidia 10 years ago and held on to it, you’d be sitting on about $2 million today.
So, let’s say that’s you.
You hit a massive home run in Nvidia and you’re sitting on a million or two worth of stock. You’re in your 50s and have another 10 years until retirement.
What do you do?
Let’s go through a few scenarios and take a look at the pros and cons of each.
Take the money and run
Having a disproportionate share of your portfolio in any single stock – even one as incredibly successful as Nvidia – is risky.
To show you what I mean, think back to the 1990s tech boom, when Nvidia’s closest equivalents were Intel (INTC) and Cisco Systems (CSCO).
Both companies were critically important to the expansion of the internet. There would have never been an internet revolution without Intel’s processors and Cisco’s switches, routers and other hardware.
No one can deny that both Intel and Cisco were cutting-edge companies at the time. Both were justifiably well respected.
And yet…
Once the dot-com boom went bust, both tech stocks got obliterated. Between the top in 2000 and the bottom in 2002, Intel and Cisco lost more than 80% of their value each… and the share price of both companies is still below their all-time highs from 2000. Twenty-five years later!
Both companies continued to produce excellent, mission-critical hardware and enjoyed fantastic growth rates for years to follow. It didn’t matter. The impressive business performance wasn’t enough to justify the stock valuations, so the shares slumped.
Will that happen to Nvidia?
Maybe, maybe not. But it’s a legitimate risk. Nvidia currently trades at 50 times earnings and 26 times sales. That’s an insanely rich valuation for a company this big and established.
So, selling or at least trimming the position little by little could be smart risk management.
Of course, if you own the stock in a taxable brokerage account, you’d also be setting yourself up for a massive tax bill. Assuming a cost basis of close to nothing, a $2 million profit in Nvidia would mean paying something in the ballpark of $400,000 in capital gains taxes.
This brings us to the second option…
Hold on for dear life
You’ve done well by simply holding on this long. The path of least resistance – and the least exposure to capital gains taxes – is just to keep holding.
There are legitimate reasons why you might want to simply hold on, apart from tax avoidance.
Nvidia really is an amazing company that continues to impress. They are the single most important company in the world right now. Why wouldn’t you want to maintain outsized exposure to one of the finest companies in the history of capitalism?
Any trader will tell you that the secret to really making money in the market is to cut your losers early and let your winners run.
That’s legitimate. But if this is money you are planning to live on in retirement, you should have some risk management in place in the event the AI bubble bursts or Nvidia suddenly finds its growth plans halted.
One option could be to use a series of stop losses. You could instruct your broker to sell off, say, 20% of your position at a certain pain point, such as a 10%-15% decline in the share price. You could have a second sell order in place to unload another 20% of your position if the share price drops even further.
This doesn’t eliminate your tax liability, of course. You’d still be on the hook for capital gains taxes on any shares you sold for a profit. But you’d be potentially spreading out the gains over a couple of years.
And if things got really bad – such as in a repeat of the 2000-2002 tech bust – you’d be better off paying the taxes rather than watching years of gains go down the tubes.
Is there a better option?
You certainly have other options at your disposal too.
If you regularly give to your church or a charity, you can gift appreciated stock rather than cash. As non-taxable entities, they wouldn’t have to pay taxes on the gains, and you’d still get the tax write-off for the donation.
If you’re willing to get more creative, there can be more exotic ways to diversify a portfolio without creating a massive tax bill. AQR, Nuveen and other specialist managers offer leveraged long/short strategies designed to create large capital losses that can then be used to offset capital gains.
To broadly summarize these strategies in general, the manager runs an aggressive long/short portfolio in which they buy stocks they expect to appreciate in value and short-sell stocks they expect to fall. There will be winners and losers on both the short and long books, but the manager is careful to only sell the positions at a loss.
These losses create offsets that allow you to gradually sell off a large, concentrated position without getting soaked on taxes in any single year.
Of course, the downside is that you aren’t really eliminating taxes but rather deferring them into the future. That might be perfectly fine, of course. And if your goal is to eventually leave the portfolio to your heirs, they would benefit from a stepped-up basis, meaning the would-be capital gains taxes would really disappear.
For a complex strategy like that, you should probably consult a professional. There’s always risk to consider with any strategy that involves shorting or leverage.
Before you do anything, keep in mind that having a large position in a single stock is a high-quality problem. Yes, it does potentially create tax issues to contend with, but that’s very clearly better than the alternative of not having an appreciated stock position!
