Do you own too much company stock?
You’ve started to accumulate company stock, whether through equity compensation grants, your Employee Stock Purchase Plan (ESPP), or in your 401(k). Perhaps you’ve seen your overall net worth fluctuate more rapidly as your company stock position increased. As a company stock shareholder, you’re subject to the ups and downs of the market AND the performance of your company. Too much concentration in one stock can lead to unnecessary financial risks, which is more commonly known as “putting all your eggs in one basket”.So how do you determine how much company stock is too much for you?
First, it helps to know what your overall picture looks like.
How much company stock do you have?
Do an overview of your company stock ownership. What percentage of your overall net worth or investments does it make up?
How do you own company stock? Is it inside of your 401(k), granted to you as a Restricted Stock Unit (RSU) or stock option? Or are you deciding to purchase additional company stock through your ESPP? Keep in mind where and how you own the stock will determine if you can easily sell it.
Do you expect to receive more company stock? Will your overall stock position grow overtime?
How diversified are you all ready?
Do you have savings or investments that aren’t in company stock? If so, what percentage of your net worth do these accounts make up?
What type of investments are these? Cash reserve, a retirement plan, or an individually owned investment account?
The goal is to have the majority of your wealth in these non-company stock accounts.
Now that you know what you have, what you’re expected to receive in future stock grants, and how diversified you are, here are some things to consider:
Start with the goal in mind, or in this case a target.
Diversifying your company stock holdings can help eliminate some of your investment risk. A good rule of thumb is to limit your exposure to any one company’s stock to no more than 20% of your total investments. That may sound high but it helps to keep in mind that’s a good starting point, your target percentage may be less. In order to help determine your target percentage between 0-20%, it helps to ask yourself a few additional questions:
What’s the company outlook? How does your company stock normally perform?
Do you have a positive outlook for your company?
What about the industry? Is it thriving or declining?
As an employee of the company, you probably have a better idea about most of its strengths and weaknesses as well as possible projects on the horizon. Use that information to your advantage to help you make an educated choice.
Is your company stock very volatile? Does it normally perform better or worse than the market? In other words, can you expect higher highs and lower lows?
Would you make the same decision to buy the stock if you weren’t granted it? Would you buy the same amount? Or would you choose to invest your dollars elsewhere?
What are you comfortable with?
This is arguably the most important question you’ll ask yourself. It has to do with your capacity and willingness to take on risk. Who cares if your company stock generally outperforms the market if you can’t stomach the lows?
Too much is anything over 20% of your overall investments. The right number for you should be somewhere between 0-20% exposure, and with some analysis, you’ll be able to determine the right amount for you. Finally, if you’re struggling with making these decisions, it’s probably time to consult a professional, like your tax advisor or financial planner.
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Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 12 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. She also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.
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