Have a Strategy for Each Block of Vesting Shares

By: Joe Morgan

Jun 15, 2021 | Company StockRSUsFinancial PlanningInvestment StrategyStocksTaxes

Prefer to listen rather than read? Pair this post with Deliberate Money Moves Podcast: Have a Strategy for Each Block of Vesting Shares.

Previously, we have focused on the stock you own that has already vested sometime in the past. We talked about understanding the risk that creates as well as knowing the tax effect of selling those shares.

Today, we are talking about newly vested shares – whether they are RSUs, stock options, ESPP or another type of equity ownership. No longer should we simply let these drift into our portfolio without a strategy or reason to hold vs. sell. Instead, we are going to develop a strategy for each block of vesting shares.

How To Differentiate Among The Shares We Are Getting

Some awards move exactly in-step with our company’s stock price. An example would be RSUs or even stock we’ve acquired after exercising our stock options. The upside and downside for these shares is entirely in-line with whatever your company’s stock price does.

So, if you have $100,000 of this sort of award it’s the same as having $100,000 of stock. These awards we can generically call “stock.”

A second type of award has some sort of boost to it when the stock does well and, in exchange for that, it can do much worse than the stock when it starts to fall. These awards are options prior to exercise and can also come in the form of Stock Appreciation Rights or SARs.

The way this works is that you might have an award that is worth $100,000 today, but could drop to zero if the stock falls below a certain level. In exchange for that, it could skyrocket should the stock do well. This is usually accomplished by providing many more shares that an equivalent award of stock would offer. These awards we can generically call “options.”

The Big Question

Assuming you have both, which award type should you consider selling immediately as they vest, and which should you consider holding?

There is no right or wrong answer here, but your answer gives some insight into how risky you feel about your particular stock in your Financial Life.

  • If you would sell both, then perhaps you already own a lot of Company Stock and would like to reduce your holdings regardless of the structure.
  • If you would hold both, then perhaps the opposite is true and you don’t own much Company Stock and would like to take a chance with it.
  • If you would sell the “stock” and hold the “options,” then you are probably somewhere in between and you like the idea of the big upside your options could provide.

You may also understand that if the options turn out to be worthless – that’s ok – because at least you’ve cashed out your stock holdings already.

As long as your strategy fits with everything else going on your Financial Life – particularly your risk structure – then it could be the right strategy for you.

A Quick Note on Taxes

Yes, it’s important to understand the effect taxes have on your stock awards – you should definitely do what we outlined in the previous video blog. But please don’t make this decision to hold or sell entirely a tax decision. In fact, no financial decision you make should be entirely driven by taxes but particularly not this one and here’s why:

The decision to hold for better tax treatment almost always requires you to hold stock for a year or more. In exchange for holding that stock, you might get a 10 – 25% reduction in taxes.

What do you think are the odds, in that period of a year, your stock falling by 10-25%? If you’ve seen how stocks behave, you must admit there is a pretty good chance that could happen, and you would have been better off simply selling at the vest date.

Let’s not make this entirely a tax exercise. Instead, the risk of our holdings versus everything else we own should be the driver of this decision.

Today’s tip is to have a strategy for each block of vesting shares.

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