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Well, this isn’t good. As of June 30, the S&P 500 Composite Index is down 20% for the year. The tech-heavy NASDAQ Composite Index is down 29% since its peak at the beginning of the year. The Russell 1000 Growth Index, which includes most large tech stocks, is down 28% year to date.
In fact, the Wall Street Journal recently reported that Facebook, Netflix, and PayPal have fallen so far that index provider FTSE Russell will now include them in the Russell 1000 Value Index and reduce their weights in the Russell 1000 Growth Index. This year’s stock market downturn is turning growth stocks into value stocks!
As a result, one of the top questions we’re hearing right now is: Should I keep or sell my RSU shares?
Of course, there is no one, right answer for everyone, and the answer depends on your individual circumstances. Here are a few questions that can help you decide what to do:
When do you need the money?
If you’re planning to buy a new home or make another major purchase soon with cash from your RSUs, then you should get that money safe. Sell enough RSU shares for the purchase and park the cash in a money market fund, one or more high-yield savings accounts, or possibly even short-term Treasury Inflation Protected Securities (TIPS). Short-term interest rates have been rising this year, and as a result, money market funds and high-yield savings accounts are starting to pay interest again in the 1% range.
What portion of your net worth do the shares represent?
If your RSUs represent a high percentage of your net worth, say 50% or more, then you should strongly consider selling some of your holdings right away to begin diversifying, regardless of the current stock price. Yes, the stock price may be down, and you may be reluctant to sell now. But remember, the rest of the stock market is down too, which can allow you to buy in at a good time. Moving into a fully diversified investment portfolio will help you more reliably meet your financial goals going forward. Reworking your investments now can get you set up for the inevitable stock market recovery, possibly at a lower tax cost.
How much value in unvested RSUs do you have?
If you still have a large amount of unvested RSUs, and you plan to stay with the company, then selling your currently held RSU shares (i.e., your already vested RSUs) can make sense. Selling the vested shares reduces your risk of loss if the company stumbles. Keep in mind that both your paycheck and RSUs are at risk if the company has unforeseen hardship—you potentially have too much exposure to one company. With a large amount of unvested RSUs, you still have plenty of opportunity for gain if and when the stock price recovers.
How’s the company doing?
Is the stock price down because stock markets in general are down? Or is there something specific going on at the company or with its products or services that’s causing investors to lose confidence? If the stock price is lower by about the same amount as the index averages above for the S&P 500, NASDAQ, and Russell 1000 Growth indices, then the decline is probably in sympathy with overall markets, and you may want to hold out for a higher price and sell when the stock market recovers. However, if the price is down more than the index averages, there may be problems specific to the company or industry. If that’s the case, you will want to consider selling your shares sooner and getting your money into a safer, diversified investment portfolio.
Over the long term, we expect the value of a diversified portfolio of stocks to grow on average. However, we can’t say the same thing about a single company. Because it’s difficult, if not impossible, to forecast the performance of an individual stock, our standing recommendation—whether the market is up or down—is to sell RSUs as they vest and direct those funds either to planned purchases or to a diversified investment portfolio. If you have been holding on to them, though, and are considering whether you should continue to do so, a thoughtful evaluation of your own financial circumstances can help you determine the best path forward.
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 would like to discuss what to do with your RSUs right now, schedule a complimentary consultation.
