It feels good to have company stock. Your employer values your work and you feel like you are being a team player.
Some of the most common employer programs are:
Employee Stock Purchasing Plan (ESPP): Typically will allow employees to purchase company stock at a discount through payroll deductions
Employee Stock Options (ESOs): Incentivize employees to hit performance targets with gifts of stock
Restricted Stock Units (RSUs): RSUs are a stock-based bonus that follows a vesting schedule.
Employee Retirement Plans: Allow employers to match employee’s contributions to their retirement plans in a tax-efficient way.
Companies want to align their employees with company objectives so they give them lots of stock. Great right? I’m here to give you some reasons why you should sell it.
Companies Rise and Fall
Just like the 4 seasons. Companies go through market cycles.
In 2000, the largest company by market capitalization was General Electric with a stock price of $50. GE founded by Thomas Edison in the late 1800s was valued close to $500 billion – manufacturing jet engines, refrigerators, and energy infrastructure systems around the world.
But by 2020, a multitude of negative factors and GE’s market cap had dropped 4-fold to $80 billion. Lowering the stock price to under 10 dollars a share and knocking them out of the largest top 50 companies. While the largest company Apple has surpassed a $2 trillion valuation. It’s hard to stay on top. In fact, only 1 out of the 10 largest companies from 2000 are still in the top 10 today. This lonely company being Microsoft.
Bottom line: Your company could be doing well today in the eyes of investors and tomorrow could fall out of favor.
All Apples in One Basket
I find that many people employed at public (and private) companies hold much of their net worth in company stock. Typically, over 70%. A large chunk of their compensation mix being stock-based and they haven’t chosen to sell any of it.
What are some of the risks associated with this?
- Higher portfolio volatility due to single stock concentration portfolio
- Likely missing opportunities to pay less in taxes
- The added risk of not reaching your goals due to higher portfolio risk
If you have been following some of my previous blog posts typically, we recommend holding no more than 10% of your net worth in company stock.
How to Sell
A selling strategy is extremely wise when it comes to selling your company. Each type of equity compensation will have different strategies to follow and variables to consider such as black-out periods, vesting schedules, and tax implications. A financial professional can help you navigate through these questions and more.
“There is no such thing as a self-made man. You will reach your goals only with the help of others.” — George Shinn
Feel free to share this article or send us a message with any thoughts.
Disclaimer: This article is for informational purposes only and is not a recommendation of WealthU Advisors, Michael Uehlein. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that the future performance of any specific security, investment product, or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.