How to Handle 'Heirloom' Stocks

When it comes to your portfolio, family loyalty can be bad for your wealth.

Consider the case of Wendy, a single woman nearing retirement who received an unexpected windfall upon her father's death, $200,000 worth of stock in a paper products company. Within just a few years, Wendy, who asked that we not divulge her full name, saw her shares rise in value to $600,000. This one investment was by far her largest asset and her best hope for financial security in retirement.

Wendy knew she should liquidate much of the stock and diversify her portfolio, but wouldn't even consider it. In fact, if an emergency ever prompted her to sell a few shares, she would faithfully repurchase shares until she reached the number that her father left her.

"I don't want to lose a penny he gave me," she explained. "I just don't feel worthy. This was a gift. I didn't do anything here."

Wendy was in the thrall of the "heirloom effect" -- whereby inheritors of stocks, real estate and even cash find that these assets take on profound meanings associated with the benefactors. Holding on is a way of keeping a departed loved one close.

Although Wendy's case might seem unusual, it's more common than long-lost heirs of Howard Hughes, as I explain in my new book The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance (Broadway Books).

During my research, financial advisers often lamented that beneficiaries treat inherited securities as if they were urns to be stored on a shelf and never disturbed. One complained that getting clients to sell heirloom stocks was "almost like cutting an umbilical cord."

Even otherwise rational investors can get caught up in these emotions, myself included.

I had been working for several years as a financial writer in San Diego when my mother passed away, leaving me a block of Exxon(XOM) stock worth $130,000. The stock, handed down by my grandmother, dwarfed my IRA and 401(k) holdings.