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Equity Compensation Is Not Your Fathers Retirement Plan

Out of curiosity, have you had the craft beer called “It’s Not Your Father’s Root Beer”? If you have not, you should try it because it’s delicious. If you have, then you get the title of this post.

I work primarily with individuals who are awarded different forms of equity compensation from their employers, but I mainly deal with Employee Stock Purchase Plans (ESPPs) and Restricted Stock Units (RSUs). Most of the individuals that have held on to those shares generally have kept them because:

1. They forgot to sell or did not know when to sell.

2. They’ve held on to stocks because of performance.

3. They thought you should wait a year in order to get a preferable tax rate on the sale of those shares.

All of these are fair questions to raise, but I want to explain how not selling these shares can put you into a predicament you probably did not see coming.

You Already Work There

It is important to recognize that whenever you have a concentrated amount of your net worth in one single company stock you are exposing yourself to an unnecessary amount of risk.

1. You work for the company, so the success of the company will likely benefit you.

2. For those involved in an ESPP and who continue to contribute to the plan, recognize that if you are planning on continuing to make contributions, you still have exposure to performance of the company stock over the next buying period.

Holding on to company can stock lead to an unnecessary amount of exposure in the form of risk and volatility. It may be easier to relate the act of holding onto equity compensation to moving in with your significant other too early in the relationship. I know this is a financial planning blog, and I am not here to give relationship advice, but there are some similarities.

Unless you own a business or are a partner at a company, you should treat your job as you would treat a dating relationship with similar aspects of commitment, accountability, and emotions. But you are not married to them, so they can leave whenever they want, with little to no consequences. So can the value of the company stock price.

What Do You Need It For?

Most people who are offered equity compensation work in the tech industry. This sector of the market has done phenomenally well over the last decade, and stock prices reflect this. Although the stock market in this field may be doing well, you should ask yourself when do you need this money? Most people will not touch these type of investments for decades. However, when you take this into account, you have to recognize how difficult it is for any individual stock to outperform market returns over a long period of time. For example, think about what the hot stock of 90’s was and how that stock has performed in comparison to market returns currently.

You Do Not Know Enough?

I often hear from people who want to hold on to their stock, “I work in the industry and have a good pulse on how the stock will perform.” I am sorry to inform you, but you do not. The people who have access to the information that would likely predict the performance of the company stock have strict regulations set by the SEC (10b5-1) on how much they can sell, when they can sell, and even the pricing. By the time you figure out that things at your company are not going well, it’s probably too late. Also, whenever it comes to investment strategy the notion of “this stock is going up” is not a real investment philosophy. Stock prices are based upon how people,” The Market Participants” feel, and not your individual knowledge on your company.

What Should You Do?

I understand if you are confident in your company’s stock performance. That is not intrinsically a bad thing. Just apply this philosophy in moderation. Consider setting a limit of 5-10% of your overall investable net worth in your company’s stock if you feel passionate about it. This should give you enough exposure to benefit from the gains, but not too much exposure in the scenario of your company falling on hard times, or the stock price taking a sharp decline.

Do Not Forget 2008

It can be easy for investors to forget the past, but we should allow our past mistakes to shape our future decisions. One of the reasons 2008 was such a crippling time for investors was a lot of employee’s had a huge concentration in their company’s individual stock, and when these companies filed for bankruptcy their stock prices tanked. It was a scary place to be for investors who put decades of hard-earned money in to funding their retirement. It can be easy to think “that will never happen to my company.” But may I ask, what if it does? Are you prepared? That is the difference between the advice a financial planner gives in comparison to the investment conversation you have with friends. We are not just looking at what your portfolio could do in the best-case scenario, but also in the worst-case scenario.

Who’s Right?

Let’s say you are right, that your company stock booms and does great throughout your working career and retirement. But what if you are wrong? You will lose over 50% of your portfolio’s value in retirement. Sometimes we think we’re willing to eat the risk till it comes face to face with us. I mean you could fly Spirit Airlines rather than Southwest, but do you really want the turbulence and fear of failing, especially if your family members were on the plane? No, so why do the same with your investment options that will impact your family?


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