I Own a lot of Company Stock... What Should I Do?

You've been accumulating company stock over the years. Now, it takes up a substantial amount of your investment portfolio.

What do you do, and where do you start managing this?

A handful of companies have seen their stock prices skyrocket over the last few years. Many people wonder if it's a good time to “do something” with company stock.

First of all, I get it. It's tough to think about selling stock after a good run.

On the other hand, maybe your stock hasn't performed well, and you’re ready to cut ties with it.

Either way, whether you knew it or not, you likely held your company stock for some future financial benefit or to build wealth to reach certain financial goals.

I get a front-row seat working with clients with a large amount of stock in their company.

I'm going to share four questions that can help you make a game plan for your company stock—or any single stock position, for that matter.

You took a big risk, but do you still need the same amount of risk?

The strategy that got you wealthy isn’t the same strategy to keep you wealthy.

One of the first things to consider is your risk capacity and ability to take risks. In simple terms, how much risk can you take without negatively impacting your financial goals?

Your investment timeline will play a significant role in this decision.

• If you intend on using any of this money in the next 10 years, you have a lower capacity to take risk.
• If you have no intentions to use the money in the 10+ years, you have a higher capacity for risk.

A higher risk capacity means you can afford to hold a larger stock position (or more risk). In other words, with a long investment time horizon, you can recover and pivot from a big loss.

You also want to understand your risk tolerance. How much investment loss can you handle before you interrupt your own plan?

Your investment knowledge and how you might have reacted during previous stock market drawdowns can be good indicators.

When we build financial and investment plans for clients, we consider how a concentrated stock position can impact the overall plan. We don’t just use a standard industry rule of thumb (generally no more than 5 -20% in a single stock) to determine if a stock position is risky or concentrated for your plan.

Here's a great exercise that we work through…

If you remove your stock position, how strong is your financial plan with your other assets and current investment contributions?

You want your financial plan to drive the investment allocation. Determine the most important goals you want to fund (short- and long-term) and consider selling (or diversifying) enough to lock in those goals. Any remaining stock can accelerate goals or create transformational wealth if it continues an upward trend.

How much do you rely on one company?

I’m sure you have heard the story of Enron, so I won't tell you something you already know. But anything can happen no matter how confident you are in your company.

Single stock concentration goes beyond the stock price…

You should consider how much reliance you are putting on a single company. I discuss three levels of concentration with my clients.

1. Your paycheck from your employer is providing your current well-being and lifestyle.
2. Your current stock position is (hopefully) providing a future financial benefit.
3. Your unvested stock provides future income and financial benefits, which means you still have exposure to the stock.

What's your marginal utility of wealth?

I first read about this from Larry Swedroe. I rarely encounter anyone who ties the marginal utility of wealth into the equation of their stock.

Once you have built a certain level of wealth, how much is gained from each incremental amount of wealth relative to the risk of a higher return?

In other words, the additional potential gains from a riskier investment are not worth the downside risk—your marginal utility of wealth declines as wealth increases.

If your stock has increased substantially, you may now have “enough.” You've won the game. At this point, losing a substantial amount of your wealth can hurt you more than gaining more wealth can help you.

As Larry Swdroe says, “While more money is always better than less, at some point, most people achieve a lifestyle with which they are very comfortable.”

What are your odds?

Very few people understand the odds when it comes to owning individual stocks and investing.

If your company stock has done very well, consider yourself on the luckier side of things. Most people are surprised that many single stocks do not outperform treasury bills, and even fewer outperform the total stock market!

According to the research by Dimensional Funds, only about 21% of stocks survive and outperform the stock market over 20-year periods!

Understanding these statistics (based on history, of course, and evidence) can help you position your overall investment portfolio and increase your odds of success.

Holding single stocks is a form of 'uncompensated risk,' which means you can't expect a higher return than the overall stock market. You might get it, but you can't expect it.

Fortunately, uncompensated risk can be diversified away with a quality asset allocation strategy and diversification driven by your financial plan.

If you're feeling overwhelmed by a large stock position, we help folks like you build a plan to reduce single-stock risk, fund your financial goals, and maintain tax efficiency.

Go invest in yourself,

Travis Gatzemeier, CFP?