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AN individual who owns a sizable block of stock in a public corporation,

and who has had the pleasure of watching that stock appreciate

in value over a period of years, frequently feels a need to diversify his

holdings. The decision to diversify would normally involve a sale of

the appreciated stock for cash and a reinvestment of the proceeds.

However, a sale for cash will occasion the imposition of a capital gains

tax equal at the maximum to 25%o of the gain realized, whereas no

tax is imposed if the securities are simply retained. Since there is thus

a difference in tax cost between selling and retaining an appreciated

asset, the investor wishing to diversify is obliged to take the tax penalty

into account and to consider whether the benefits of diversification

are really worth a substantial reduction in his personal wealth. The

question is presumably a difficult one, and the investor's reluctance to

suffer an immediate and highly visible impairment of capital may ultimately

lead to the abandonment of what otherwise would commend

itself as a sound personal investment goal.

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