News & INSIGHTS

By Aaron Marks | Founding Partner, Chief Strategy Officer, Wealth Advisor

Imagine using your entire cash bonus to buy stock of the company that you also work for. Not just once, but every year. Year after year. To the point where an outsized part of your liquid net worth is tied to just one company. Doesn’t seem like the most prudent financial decision, right? Well, many of you who work for public companies are doing exactly this without even realizing that you are.

For employees of public companies who receive part of their annual compensation in Restricted Stock, a lot of the time these shares just continue to build in a brokerage account without having much rhyme or reason. Sometimes it is inertia and quite frankly just easiest to not act and sell stock. Many times, it is the belief that the company you work for is better than most other public companies, and in turn, your investment performance will vastly outpace the broader stock market. And some would venture to say that most of the time it is the sheer fear of missing out and making the wrong decision that can end up costing you meaningful dollars that might have led to early retirement, ability to give more to charity, helping a family member in need, etc.

I would like to just give one perspective on why some say that you should consider selling your company stock as soon as it vests.

In an overly simplified example:

• You receive $75,000 of Restricted Stock Units from your company.
• Several years down the road on your vesting date, a portion of your shares are withheld to cover most of your taxes, and the remaining shares are deposited into your brokerage account free of any more company constraints.
• Let’s also assume that the after-tax value of your stock is now $125,000 (or $50,000, same argument).
• The $125,000 now has a cost basis of $125,000 (meaning any gains from this point forward will be taxed upon sale) and this is when your fork in the road occurs.

On one hand, you can choose not to sell your stock and hold onto it “because the stock is really undervalued right now” or “the company is on the verge of some really amazing things” or “the stock has really done well over the years and treated me well” or one of many other similar comments. In this case, you functionally received a cash bonus of $75,000 that was tied to your company stock performance, it then grew to a post-tax amount of $125,000, it was paid to you as cash, and then you turned around to buy $125,000 of company stock.

If you aren’t taking your traditional cash bonus and using 100% of it to buy company stock, why not? This is effectively what is being done when you choose to not sell vested company stock.

On the other hand:

• You could sell your stock as soon as possible after your vesting, and immediately reinvest the proceeds into a suitable investment portfolio that meets your needs.
• The proceeds could be reinvested into a 100% equity portfolio that hopefully outperforms the stock that you just sold.
• It could be invested in a diversified strategy to help meet both short- and long-term goals.
• But one could argue the more important reason to sell is to remove the unpredictable risk of having so much of not only your net worth, but also your job and livelihood tied to just one company.

If your company and stock falter for one of a thousand reasons (economic issues, competition, scandals, etc.), this could lead to job cuts, reduced bonuses, and more uncertainly which you could have otherwise avoided.

The argument could also be made that by selling your stock right away you would have a more manageable tax picture in the future. If your company stock does perform well, you just become more and more concentrated, which then, in turn, forces the issue of selling stock which leads to more of your hard-earned dollars going to Uncle Sam. With a diversified portfolio, there could be less pressure to sell because you won’t have the over-concentration into just one position.

Now, I know there are other variables involved like also receiving a traditional cash bonus alongside stock awards, certain companies requiring executives to hold onto a certain amount of stock, or a myriad of other reasons, but this is just some food for thought as to why it might not be the smartest idea to let Restricted Stock accumulate over time.

Amplius Wealth Advisors, LLC is registered as an investment adviser with the Securities and Exchange Commission (SEC). Any 3rd party information contained herein was prepared by sources deemed to be reliable, but is not guaranteed. This information should not be used as the primary basis for investment decisions, nor is it advice meeting the specific investment needs of any investor.

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