There has been no shortage of volatility with global equity markets on a rollercoaster ride this year. A steep drop in prices scares investors and heightens our senses to pay attention to avoid making mistakes. However, this fear can lead to indecision or taking no action. No one can predict how stock prices will move or how long it will take to recover from a market drawdown, so a long-term strategy is critical.
Long-Term Strategy for RSUs, NQSOs, and ISOs
A long-term strategy for employer stock compensation should also be followed during volatile markets. Grants (RSUs) and options (NQSOs and ISOs) are equity compensation earned through your ‘sweat’ equity, so it’s easy to act when the company stock is up because it reflects your direct efforts. What happens when the stock price at vesting is below the grant price?
Without a strategy, many people avoid making any decision and hold the stock with hopes of a rebound or are extraordinarily risk-averse and sell at inopportune times because of volatility.
Things to consider while creating a financial plan incorporating stock compensation:
What price would you sell? It’s easy to have a bias towards your employer and become fixated on a specific price, whether it’s based on the grant price or a certain threshold you determine to be necessary. Although it’s normal to have certain expectations, we need to be realistic about the value of company stock.
Say you were granted 200 shares at $100/ share on a 4-year vesting schedule. Throughout year 1, the company stock did very well and reached a $125/share high. The excitement builds as the first vesting period approaches, only to become apprehensive as the price drops to $50.
You want to hold onto the stock because you think it will rebound. After all, the company’s performance has exceeded projections. From talking with your coworkers around the virtual water cooler, you determined that you would not sell at vesting unless the price reaches a threshold of $80/ share.
Let’s break this down by looking at the return required to obtain the price thresholds when the stock is at $50/share.
It would take a 60% return over one year, 26% return each year for two years, or a 17% return annually for three years to get from $50/ share to a price of $80/ share.
Is it feasible to assume that the stock price would recover in those increments in the near term? Would you maximize your return and lower risk by investing the money in a diversified portfolio? Do you need the liquidity from the sale of the company stock for a short-term goal?
The decision to sell or not to sell when the markets are distressed is based on a few factors:
The data trends of your company and the industry - What happened in the past is not a guarantee for the future but indicates a possible outcome.
Your unique financial plan - What works for someone else may not be the optimal solution for you.
Your need for cash in the short term - It may be better to use the sold stock to fund a goal rather than relying on debt.
How much of your financial net worth is in company stock? Concentration in one stock can expose you to excessive risk and significantly impact the total balance if there are fluctuations. Say your investable net worth is $1,000,000, and the company stock price drops by 20%. When the concentrated stock is only 5% of your investable net worth, the decline is only 1% of your total assets rather than 5% when the concentration is 25%.
Rather than relying on a generic approach, work with a financial advisor to analyze your stock compensation with your long-term financial plan in mind. Every company and industry is unique, so I recommend engaging an advisor to create an actionable plan to be proactive rather than reactive. The most challenging part is executing the plan; however, this dynamic process will reduce your stress about money, support your current needs, and build assets for long-term goals.
Are you a pharmaceutical professional, dental professional, or newly independent woman? Our financial planning services could benefit you.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.