Understand the Risk Your Company Stock Creates in Your Financial Life

By: Joe Morgan

Jun 3, 2021 | Company StockFinancial AdvisorsIndependenceWealth

Is the amount of stock you have accumulated starting to look large to you? Do you want to be sure you are doing the best thing with this important asset?

If so, then what you are sensing is probably a conflict of two very different feelings about your stock.

On one side, you may believe there is still tremendous potential for your stock to continue to rise. You see the good things going on at the company and you know from the past that the stock can continue to grow rapidly in the future.

On the other side, the dollar amount of stock you now own is likely very significant to you. If it were to fall by 30% or 40% that might create some real regret in terms of holding onto the stock and could even affect your future. Perhaps you haven’t felt this conflict before because the dollar amounts were lower. But now, you feel it is time to do something.

Here, I will provide some context for how you can balance these two very different feelings.

How to understand the risk your Company Stock creates in your Financial Life

Grab a pencil and let’s write down all the major resources you have:

  1. Cash balances – just write down one number that is the total of what you have in your checking and savings accounts.
  2. Investments – the amount you have invested in your diversified portfolio that is NOT your Company Stock.
  3. Properties – the value of your home and other properties
  4. Company Stock – how much do you have? Be sure to look at it relative to your other resources.

How does this make you feel?

Do you feel confident and happy that your Company Stock is providing this level of support for your family? Or do you feel scared that you have so much money in one place? My guess is your feelings are somewhere in between, which is the balance we are trying to find.

How much of your Company Stock would you need to shift into your broader, diversified portfolio to feel confident your risk is at the right level?

Whatever that figure is, make a note of it.

We’ve just found the amount of stock that is right for you from an emotional level. But we’re not done yet! Let’s look at this from a numbers perspective, leaving our feelings out of it for a moment.

I don’t know the company you work for, but I can imagine there must be hundreds, thousands, or even tens of thousands of people that work there. There’s also a board of directors and a CEO and those positions might change from time to time, but they are all humans.

What are the odds that one or a group of those people might make a mistake so big that it could cause the growth prospects for your company to stumble?

With all those people making all those decisions every day, it seems inevitable. A single company, with a single board of directors can make such a mistake very easily – and it happens all the time.

For this reason, without making any comment about your actual employer and not even know who your employer is – I can tell you that you should not have very much of your money tied up in THEIR stock – or any SINGLE stock, for that matter.

You already have your income tied to this one company and now you have a certain percentage of your wealth there too. We don’t expect anything bad to happen, however, we know the consequences if that small chance that something bad happens actually comes true.

Now, you have vested stock and you have unvested stock. Your vested stock may already be too much, and you can do something about that, which we will talk about in the next few blogs.

Your unvested stock, on the other hand, is exposure that you can’t reduce at this time, so you will never be at zero Company Stock as long as you work there, and they continue to give you awards.

You have a responsibility to yourself and your family

Make sure you manage this risk well and, most likely, that means beginning a process to reduce your Company Stock and move funds into your Long-Term Portfolio Strategy.

Taking in the right information and processing it well can lead to the right decision making and, over time, will allow you to build your Best Financial life.

Now that you understand the risk that your Company Stock creates in your Financial Life, are you ready to make some changes?

Today’s tip: Understand the risk that your Company Stock creates in your Financial Life.

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