What To Do With Company Stock? Should I Sell or Hold The Positions?
With the explosion of companies going public these past few years, more and more of the new clients coming to me ask questions relative to the stock options they have received through their employer.
Should I be selling my stock options or hang onto them?
How much should I be selling?
At what price do I sell my options?
What do I do with proceeds from the sale of the stock?
Sudden windfalls from vested stock options could pose questions that you never had to have asked yourself before.
Asking these questions is a standard process of your path towards financial independence. For many of the individuals that I work within this process, the chief similarity of their situation is that they are often very devoted to their company. Not only do they commit long hours, but they spend the majority of their waking moments sweating and metaphorically bleeding to ensure the company's success. More often than not, for company stockholders, the emotional value is more important than the intrinsic valuation. It is understandable given the amount of time and dedication involved. Still, I urge individuals in cases such as this to take a step back and think through the situation without the emotional attachment.
By associating the company stock you hold as no more than what it truly is, a financial instrument, you are better able to make rational and sound decisions relative to your economic life.
After you have made this mental pivot and are looking at your company stock as just a financial instrument, allow yourself the moment to take stock (no pun intended) of what you are holding. Perhaps like most, you will find that most of your overall net worth and nest egg comprises the company stock granted to you. At this point, you ought to ask yourself these two primary questions to ascertain whether you should be selling or keeping the company stock:
What financial concerns make me cringe?
What are my immediate, short-term, and long-term goals financially?
Would I feel more comfortable with a more diversified investment portfolio?
Starting with the first question, it's always good to have a baseline that you maintain which determines how you are feeling about your overall financial health. I pose this question to myself every six months to mentally check in on a potential stressor that distracts me from living an overall healthy life. You start this assessment by just thinking through your financial life and listing all of the annoying things. Examples could be:
My student debt doesn't seem like it's decreasing;
That vacation I put on my credit card twelve months ago is still on my credit card;
I'm concerned our country might go through a recession, and I might lose my job; thus, I wouldn't be able to pay for my housing while I look for a new job.
The kids will go back to school and need stuff, like clothes, more stuff, and other stuff!
The individual (or joint if you're together with a significant other) assessment is a means for you to determine what causes mental stress from financially related matters? I genuinely believe that we must have a sound management system in place for unexpected financial circumstances for us to live our best selves. It's no secret that if you can decrease your stressors, you will live a more abundant and prosperous life! But yet, from the hundreds of individuals that I have talked to in the past, very few sat down and identified what financial stress they suffer through and proactively plan to reduce it.
When it comes to items that plain stress you out, it might just make perfect practical sense to cash out on your stock options when they vest and use the funds to knock down some debt. Or if it's the lack of a safety cushion, then cash out some stock and keep it in a readily available savings account. For proper planning, you ought to have a rainy day fund, and stock options that you may not be able to sell for 90 days aren't going to cut it. When they vest, keep it in cash after selling it so that you have peace of mind knowing that you are fine in the event of a financial oh snap moment.
Financial instability or financial insecurity is one of the leading causes of emotional distress and can lead to severe depression. Let’s face it: poor financial health can eventually lead to overall poor health.
After you have done that, you should jot down your immediate, short-term, and long-term financial goals. Remember that, like water, our lives are fluid, so do not be inundated in trying to paint a crystal clear portrait of all your objectives. Instead, break it down into timeframes, such as what you want to accomplish in the next six months, two years, five years, and ten years.
A six-month goal could be that you want to take two months off backpacking through South America, and you want to make sure you have the financial means to cover all aspects of the trip plus the ongoing maintenance cost of your home.
Your two-year goals could be having saved enough for a healthy down payment for your house or having your student loans obliterated, or perhaps just getting the car paid off.
The five-year goals could be starting a family and making sure you or your spouse can take an extended absence to enjoy the first few years of your child's life. Or perhaps it could be that you want to switch full-time, focusing on your side hustle, and want to have enough funds set aside to sustain yourself.
The ten-year goals may still be murky, but financially, it could be something as simple as having a pre-set savings. Perhaps you want to have a half-million in your retirement nest egg or even a million dollars! Perhaps your ten-year plan is to be completely debt-free inclusive of your home mortgage. Let these bigger dreams and goals filter through your mind as you start jotting all of them down.
Once you have done this exercise, your next objective is to take stock of all you have written down and compare it to what you are currently doing. If it's that big trip that you've been dying to go on, but you haven't saved enough yet, then perhaps it may make sense to sell some of your stock to fund it. Now granted, sound financial planning means you are probably not in debt and can afford everything else, but just the high cost of living may be prohibiting you from saving as rapidly as you can. If that's the case, why not live a little and sell some of the vested company stock you have earned through the years to fund your dream trip? If owning your home is a dream and the vested stock can help you achieve that dream, why let the opportunity slip? Wouldn't you feel so much better if you lived in your dream home instead of staying as a renter?
My point is that unless you have identified your goals, it is impossible to determine whether they are achievable unless you look at the complex financial numbers. Instead of letting the dreams stay as dreams, I suggest you take charge of those dreams by utilizing the financial instruments at your disposal.
You can’t plan for something unless you assess and can visually see what you’re trying to obtain.
Lastly, understanding that all investments have risk relative to their reward and how you are affected by that risk is vital to your overall financial life. If the company stock is a majority of your nest egg, it may be in your best interest to have a more well-rounded and diversified portfolio. This is not to say that you should not be investing. Still, if the thought of losing a significant portion of your nest egg down to a missed step from one company causes anxiety, then diversification is critical.
Every company that is publicly traded will go through market cycles. The stock rises and tumbles most of the time due to no outlying reason other than bad press. Additionally, in our modern times of social media influence and heightened retail investor interest, any perfectly sound company's stock price can fluctuate downwards just from unintended news. If the company you work for runs into this, and there's a pretty good shot that it will only cause this is the nature of how Wall Street works, you may want to diversify. As they become vested, sell your positions and re-invest in outside companies. Vested stock is a prime time because you are already paying taxes on the vestment, so why not take the opportunity to diversify as well?
Selling your stock options should not be driven by a price target or a monetary value. First and foremost, it should be driven by your overall financial picture and whether they need to sell is here. Selling out of your vested company stock doesn't necessarily mean you're losing out on potential future gains. It just means that you have locked in what you have made and are ready to take some risk from overexposure off the table and diversify into other investment opportunities.
Assessing your financial life is essential in making this critical decision. Having a thought plan on the tax liability and investing is imperative to making a wise investment decision. Don't hesitate to reach out to your trusted financial planner or CPA when it comes to assessing this situation. If you have not worked with a financial planner before or would like a second opinion, I would be more than happy to help you assess your situation and provide you with your best-case scenarios on reaching your financial goals!
Thanks again for tuning in, and until next time I wish you and your loved ones the very best!