Protect Your Assets by Understanding Your Exposure

By: Joe Morgan

Nov 16, 2023 | Company StockDiversificationRSUsLong-Term PortfolioEmergency FundCash FlowFinancial Planning

Prefer to listen rather than read? Pair this post with Deliberate Money Moves Podcast: Protect Your Assets by Understanding Your Exposure

Many of my clients originally reached out to me because they have a lot of company stock and don’t understand what it is or when to sell it. They are aware they lack “diversification,” but don’t know what to do about it—or if diversification is a big deal at all.

Meanwhile, the stock keeps going up, so there doesn’t seem to be a problem to fix. Until, of course, it stops going up. That’s usually when we make contact.

If you’re in a similar situation, I can help you take control of your stock exposure now, so you aren’t overexposed in company stock and vulnerable to big financial hits.

In this blog post, I’ll illustrate how we let stock build-up, why it matters, and what to do about it.

How Does Financial Overexposure Happen?

If you work for a technology company, one of the easiest ways for your employer to pay you is through stock.

Your company stock is part of the pay you get for doing your job. It’s not a bonus. It’s required to keep you there! (I mean, what would you do if they suddenly canceled all your unvested shares? You’d leave, right?)

This stock, whether in the form of options, RSUs, PSUs, or even ESPP, can accumulate over time because they don’t make it easy for you to sell. You might have to log into Morgan Stanley or Fidelity (or wherever) and navigate a clunky, poorly designed-site while trying not to misclick and create a financial problem.

  • Even then, which shares should you sell?
  • What day should you sell?
  • What are the tax implications?
  • Once you sell, what do you do with the cash you aren’t currently spending?
  • How do you invest it?

All these questions add up to paralyze you while your stock just continues to build.

Why Does It Matter if My Stock Continues to Build?

You’ve seen your stock through ups and downs, and you have strong confidence in your company—as have so many before you. Why not just hold on?

The risk here doesn’t come from the possibility of your company or employer stumbling into failure. The risk is simple: Having too much concentrated in one place.

Not only is your stock tied to your employer’s health, but so is your job! You have both your wealth (what you have) and your income (what you make) tied to the same company. Don’t do that!

Thinking long-term, it’s easy to see that no company lives forever. They all have their life cycles from infancy to growth to maturity to becoming outdated. The large tech companies of yesterday are more motivated to avoid becoming outdated vs. actually being innovative.

Because no company can be the market leader forever, there will always be a newer company to take the lead.

Knowing this, why concentrate so much of your financial success on a single company—no matter how much confidence you have in it?

What Should I Do Now, with My Company Stock?

If you’ve read this far, I’m guessing you already know what you should do: Sell at least some of your company stock to reduce your dependency on them.

As a general guide, you should never have more than 10% of your investments in your company stock. In fact, I prefer not having any vested company stock, and instead investing in a diversified portfolio that wins out over the long run.

I understand that sometimes you don’t want to sell just yet. You think you understand why your stock is where it is and where it will go. I’m only saying you should temper that feeling with the 10% maximum guide to be sure you won’t take a big financial hit.

Here’s a thought exercise to understand what I mean:

  1. Add up all the company stock that you have today into one total.
  2. Cut the total by 60% and imagine how it’d feel to lose that much.
  3. Now, imagine you lose your job at the same time.

Ask yourself:

  • What sort of financial condition are you in?
  • Can you pay your bills until you find another job?
  • Are there any upcoming family vacations or home repairs that you will have to delay?
  • Does this affect your plans to take an unpaid sabbatical?

If you cut your stock holdings to the point where the answers to those questions are satisfactory, then you’re on the right track to own the right amount of stock for you.

Thoughts that Get in the Way of Your Financial Health

There are two objections that I hear most often.

First, I’ve heard people say they don’t have a place to put their cash proceeds. You should have a process for managing all your cash flows that ensure you are balancing today’s and tomorrow’s spending needs. This way, you’ll always know where your extra cash goes.

Second, I’ve heard people say it’s simply easier to leave the stock in their accounts and do nothing. I completely understand this feeling and believe it comes from a place of not having a plan. Once you know what you’re truly saving for and how to make it happen, such complacency has a more difficult time winning the day.

Understanding and Implementing the Right Level of Exposure

Once you create a process for limiting your company stock holdings, you won’t be faced with the constant decision of when or how much to sell. The anxiety of watching your stock price every day will vanish after you create a long-term portfolio that drives your financial plan throughout your life.

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