Owning company stock can be a great way to participate in your company’s success. You may have received the stock through restricted stock units (RSUs) or stock options from your company or purchased shares directly or through an employee stock purchase program (ESPP).
Through these different means, company stock can come to represent a significant part of your net worth. As stock options vest or you continue to purchase shares, your holdings can start to accumulate without your realizing it.
In this article we will consider how much company stock you should own and what steps you may want to take with your current holdings.
How Much Company Stock Should I Own?
Rules of thumb say that company stock should not make up more than 10%-20% of your net worth.
Why 10%-20%? Above this level, your portfolio has a lot of exposure to one company and the specific risks that come with it.
When you own company stock, you are exposed to company risk in two ways. Both your income and your investments are linked to the company’s performance. If the company’s performance heads south, a change in your cash flow could be coupled with a fall in the value of your stock holdings. A cut in year-end bonus or lower sales commissions can be compounded by a meaningful drop in your net worth.
It is true that concentrated positions have generated substantial wealth for some. However, when you have a lot of your eggs in one basket it can lead to large gains in your net worth and also to big losses. For every Amazon and Berkshire Hathaway, there is an Enron and Lehman Brothers.
The answer to this question is more than a simple percentage and is different from person to person. A worthwhile exercise is to think about how a sharp drop in the price of the stock would impact you. Would it delay your retirement 5 years? Make it difficult to pay for your kids’ college expenses? Asking questions like these can help guide your thinking around your company stock holdings.
What if My Company Has Done Really Well?
Hopefully, your company stock has performed well and has allowed you to accumulate meaningful wealth through your stock holdings.
However, this doesn’t mean it will perform well going forward. A drop in the stock price could be driven by an economic downturn, company specific issues or industry headwinds.
It could even be driven by completely unexpected events. A recent example that comes to mind is the impact of the COVID-19 pandemic on airline and hotel stocks.
When company stock has an outsized weight in your portfolio, it is worth exploring the benefits of diversifying. This could mean diversifying the single stock risk by buying a broader portfolio of stocks or by moving into a less risky asset class like bonds or cash.
This decision process should include consideration of the other assets you own and what your goals are for your money.
I Own a Lot of Company Stock, What Should I Do Now?
1) Figure out how much company stock you own – When you consider the shares you hold along with vested options, what does this add up to. Then look at what portion of your overall wealth it makes up. These may include 401(k) accounts, rollover IRAs, and regular investment accounts among others. Also consider whether these other assets are stocks, bonds or cash and how risky they are.
2) Decide on the goals you hope to achieve with your stock – You may have viewed this stock as part of your compensation or bonus money to spend. Over the years, it is likely you’ve thought about what you would like to use it for someday. This stock may be earmarked for an upcoming home purchase, retirement savings or even inheritance for the next generation.
3) Determine how much stock you are comfortable with – This is based on both how much risk you can handle and how much risk you can tolerate. How much you can handle is tied to what you want to achieve with your investments and the other assets you have to support these goals. How much risk you can tolerate is based more on your personality and comfort level with seeing your net worth go up or down by a particular dollar amount.
4) Understand the tax consequences – Hopefully your stock holdings have unrealized gains, although they could be at a loss also. As you look at selling stock, consider the resulting tax implications and how these would impact your overall tax picture.
Owning company stock can be a great way to build wealth and allow you to participate in the company’s success. This stock can become a major part of your wealth and it is important to consider how it fits into your overall financial picture. If you would like to learn more about how we help people manage their company stock holdings, please schedule a call.