(3 minutes to read)
You probably hear a lot about diversification. Right?
Nobody particularly wants to hear more about this, and honestly, I don’t want to write about it again—it’s boring for me. But I’m going to do it anyway, because it’s important, and when people don’t get the message (which happens often), their financial health can really suffer.
I heard the “failure to diversify” story yet again last week, about a mutual acquaintance of a client of mine who didn’t sell their company stock before the price dropped significantly. Unlike the client, who also works at the same company but has been regularly selling RSU shares upon vesting, the mutual acquaintance lost a lot of money when the company’s stock price tanked. To put it simply, that sucks. They just added several years to their work-optional endpoint.
Most of the time the reason this happens (holding the stock and failing to diversify) is simple inertia. People are busy and just don’t get around to it. It’s not a priority. And it doesn’t seem to matter much, because the stock is doing fine (right up until it isn’t).
Inertia is never the right financial strategy. Making the decision on what to do with your vested RSU shares proactively and regularly needs to be a priority if you want to grow and protect your wealth.
A good way to get clarity around this decision is to ask and answer this question: If the company paid you a bonus in cash, would you immediately invest the cash in your company’s stock?
Most people wouldn’t. And I bet you wouldn’t either.
If you wouldn’t invest your cash bonus in stock, then why hold on to the stock? You’re making the same investment decision, just framed a little differently. In one case, you’re given the stock and you let inertia make the decision for you to keep the stock. In the other case, you’re given cash and have to actively decide to buy the stock, and my experience says you probably wouldn’t do that. The point is be proactive. Make an intentional decision to safeguard your net worth.
Another reason people may hold on to their company stock is they think, or usually they feel, they know something about what’s going to happen with the company stock price in the future. I am always skeptical, and nearly always right, about people’s ability to skip ahead on the timeline and see what comes next in the universe. Even professional investors have terrible track records in this area. If anyone could truly tell what was coming next, they’d already be billionaires, and they wouldn’t be sharing the information with you.
If you think you know how your company’s stock is going to perform in the future, think again. You don’t know better than the sum of all market participants. The stock market already incorporates all available information about the future prospects of the company. You don’t know anything that’s not already out there. The current price already reflects all the publicly available information, and even some that isn’t public, because really smart analysts piece the mosaic together from disparate bits of intel, CIA-style.
Okay, there are exceptions. Another client who is a tech sales executive does know about things in their company’s future, and in that case, we caution them about insider trading and let them make the call on whether to accumulate vested RSU shares or sell upon delivery. If you’re in a position to know something important about how your company’s sale pipeline looks, or whether a big new product is about to launch after successful customer trials, then by all means, use that information to guide your decision on whether to hold or not. If you’re not in a position to know these things, go ahead and sell those RSU shares as they vest.
You don’t need to speculate on a single company stock to meet your financial goals. What you do need is to take control of the situation, most likely by selling the stock and investing in something much less risky, like the entire stock and bond market.
Small US stocks have earned 12% per year on average over the last nearly 100 years, and large US stocks have earned 10% per year on average over that time period. Bonds have earned about 5%. We have every reason to believe that investors will continue to demand that much on their investments over time, and therefore companies have to deliver financial results that enable investors to earn those expected investment returns, or else those companies won’t be able to raise money in public stock and bond markets.
The market offers a healthy return that is more than adequate to meet your financial needs. Take what the market gives you. Don’t outsmart yourself by trying to speculate on a single stock.
Yes, occasionally someone—maybe you, maybe your neighbor—gets lucky by holding on to a single stock. But luck is not a reliable wealth-building strategy. In almost all cases, it’s better to sell those vested RSU shares and invest in a diversified portfolio of large stocks, small stocks, international stocks, and bonds, and let the market do its magic: growing your money steadily over time.
Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want help properly managing your RSUs and using them to build wealth, schedule a complimentary consultation.
