Q&A: Managing Company Stock
If you’re reading this article, you’re probably holding onto a large position in your company stock which has either come from you building a business from scratch, or you’ve received it as part of your employment compensation package.
Our goal in this article is to answer some questions you may have about stock concentrations, how they can affect your wealth today, and why diversifying away from them can help you in the future.
What is the F.A.M.E. Principle and why is it crucial to avoid falling into the trap of invincibility?
The F.A.M.E. Principle is a useful acronym to remind individuals with stock-based compensation plans that the benefits derived from the bull market shouldn’t be underappreciated.
Chance favors the prepared mind, and those with large concentrated equity positions need to manage their vested stock exposure just as they manage their career. For those fortuitously aligned with company stock, don’t get caught in the misconception that the same pace to stock appreciation would necessarily continue nor that the value of existing stock won’t erode. That could be an error.
Rather than ignore that markets can and will be volatile, consider taking a few chips off the table. Re-allocate your hard-earned capital towards building a diversified portfolio which might better stand the test of time.
This period really is compared mostly to the late 1990s. At that time period, it was pretty helpful to use the quote, “Don’t confuse brilliance with the bull market.” So whereas patience is certainly rewarded when fundamentals dictate the market might be in a trough, one needs a different mindset when the broad indicators illustrate we could be closer to the upper end on historic measures.
If you’re interested in reading an article on the F.A.M.E. Principle, click the link here.
How should an investor factor in the risk of their single stock in the context of their broader investment portfolio?
It’s not unusual that your employee stock might be the majority of your net worth in the early innings of your career. What we often recommend in a client consultation is that over time, a single stock shouldn’t be larger than 25% of the entire portfolio. Numerous inputs factor in the decision, including age, capital gains within a tax bracket, and of course, the expected path of the underlying company. By all means, one size does not fit all.
If you don’t have a broad portfolio outside your company stock, you can’t derive your targeted concentration percentage. Hence, we suggest one consider using a portion of their vested company’s shares as feed stock to build that portfolio. Just as one should contribute to a 401(k) to take full advantage of your employee contribution, one might consider it a parallel exercise where you are occasionally trimming against your position during open trading windows. We rarely recommend large liquidations, but do suggest having a system in place for the dual purpose of diversifying while building your investment nest egg.
How have stock concentrations become a huge driver of wealth today?
Since 2019, we’ve witnessed a very healthy market with a remarkable surge in initial public offerings (IPOs) from companies such as Pinterest, Uber, Lyft, and Beyond Meat. Such long-awaited and quite successful deals created what, Mark Strahs, Sand Hill's Co-Chief Investment Officer and Shareholder, calls “a bit of a frenzy in the market with many investors essentially tripping over themselves to chase new fresh deals with fresh capital in hopes of finding the next Tesla.”
Why is diversifying away from stock concentrations so important?
Diversification away from company stock–which is often the majority of your net worth in the early innings of your career–allows you to derive your targeted concentration percentage. It’s important to understand the potential tax ramifications and estimated net proceeds you could receive from any given investment scenario.
How does Sand Hill approach diversifying away from company stock for their clients?
We strive to simplify the overall equity picture in a really digestible format and eliminate the added stress that often comes from navigating their company’s online equity portal. Our clients appreciate seeing all of their equity components in one place including RSUs, non-qualified stock options, incentive stock options, ESPP, and performance stock units, which are some of the more common forms of equity compensation.
Through this equity dashboard, we include the estimated tax consequences of selling short-term versus long-term. We often consult with the client’s tax professional to make sure we are working with accurate figures. Once that is all constructed, we test out the impact of selling at a range of prices, allowing our clients to clearly understand the potential tax ramifications and estimated net proceeds they could receive from each scenario.
Our wealth managers partner with our investment team to help clients understand how Wall Street views their company, which can differ from their perspective within the company. In this way we can incorporate our investment team’s insights into the decision-making process.
At the end of the day, each of our clients have their own long-term goals in mind, and we help them better understand how taking these steps to diversify will help them achieve those goals.
How does Sand Hill manage concentrated equity positions?
We aren’t robotic when it comes to managing stock positions. We run in individual equity strategies, so individual stocks are a big focus at Sand Hill. When managing concentrated equity positions, we monitor the companies and their peer group, listen to the conference calls, really track the fundamentals to make sure we have a good sense and an opinion and when to consider trimming against a holding.
As it relates to freely tradable stock, not restricted by employee trading windows, we do also consider other processes, including using option strategies and exchange funds to help in the diversification. What we try to avoid is reducing exposure based on emotional reactions when a stock might be under excessive pressure for the wrong reasons.
If you have any further questions regarding your stock concentrations, please contact us to schedule an appointment with one of our wealth managers.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
Video Presentations All video presentations discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA's or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
We all want our financial journey to be clear, straightforward, and dependable. We want our growth to follow a steady upward trajectory with no surprises, anchored in wisdom and unshakeable strategy.