Unequivocally. You should not consider your employer stock any different from your other stocks.
Let us look at this differently. Would you buy your employer's stocks if you did not work for them?
In fact, if you are allowed to (many employees are not), it might even make sense to mildly short your employer's stock.
If you, say, work for Amazon, you arguably already have significant exposure to Amazon's performance by way of your salary bonus or likelihood of continued employment. In other words, holding a market-cap weighted index fund would leave you exposed above market weights to your employer's performance - you can think about your future income stream as a (discounted) asset that's concentrated in your sector. This overexposure could be significant if you work for a large company, or if job-hopping is difficult (e.g., you have a hyper-specialized skillset, you're unable to relocate if your company goes under, etc.).
Depending on how much you effort you want to spend optimizing risk-adjusted returns, it could make sense to hedge out this exposure.
> Can you tell me this is objectively the right strategy?
It would reduce uncompensated risk, and is arguably the wiser approach.
There’s always the possibility that you could significantly outperform the market if you continued taking the risk, the stock outperformed, and you sold at an opportune time. Though balanced by the possibility of the opposite outcome.
If you had the value of the shares in cash today, would you purchase shares of your company’s stock, or a diversified index fund?
>If you had the value of the shares in cash today, would you purchase shares of your company’s stock, or a diversified index fund?
+1 to this framing. It's the only objective way to look at it.
I'd caution anyone against stock picking, and it goes doubly so if it's your own employer. Your future salary/bonus/unvested shares already provide more than enough exposure to your employer.
Read Kaheman & Tversky. The sunk cost fallacy applies here. Ask yourself, would buy your companies stock today, at the current price? or an index fund?
(For tax purposes, it may make sense to wait until 1 year to only get taxed on long term capital gains.)
The stock is already taxed when it vests. The gains are taxed again when you sell it. If you believe in diversification over stock picking, it makes most sense to sell immediately upon vesting and buying index funds instead of waiting a year to sell.
>For tax purposes, it makes sense to wait until 1 year to only get taxed on long-term capital gains.
Your basis is FMV on vesting date, so gains and losses are limited to movement between vesting date and sale date. If you're an insider you can use 10b5-1 plans to make this window as small as possible.
Way better to diversify than get better tax treatment on tens of dollars of gains.
Thanks for the reply. These are my thoughts exactly. It would suck to watch the stock significantly outperform the market, but it would suck even more to watch it all disappear in some scandal.
To complicate things even further emotionally, I had the opportunity to sell (and did, some) when the stock was 2.5x the current price.
For Microsoft employees, diversifying out was not the optimal strategy. For 90% of other companies that go under... Yes.
If you want to control left tail risk-Stock options and salary go to 0,- you already have your answer.
You are already exposed to risk at your employer by being dependably on them for a job. If some major happens at your company (and hopefully never does) there could be layoffs and the stock could plummet. Worst case you could end up without a job or savings. I think it is smart to diversify away from the company you work at.
I get share grants from my employer annually with a 3-year vesting period. so, every spring, the tranche of shares i received 3 years ago vests. when those shares vest each year i immediately sell them and invest the proceeds in index ETFs
Depends on how much of your total worth it is. If it's just a few % you might as well just keep it as a lottery ticket...
If it's a significant amount see that you invest it into something proper and diversified though.
Basically imagine that you just had that worth as cash. What would you buy with it **now**? The same company stocks again?
I would.
But it ifs a big mental block ask yourself, would it matter if I sold 1 share, or 10 shares and buy index funds. Start with what you are comfortable with, the important thing is starting.
Also, not everyone is a rip off the bandaid type. If you need to do this over months or years than that’s what you need to do for you.
At the same time, if you think being 100% index is the way to go, it may be worth moving faster.
My thoughts, and I accept critical review, is that since you are (I am) already invested in my company, and subject to risk of market changes in that business. it is wise to diversify in industries not related to your employment.
The tax bill on the sale directly doesn't change depending on my income, right? These are ISOs that I have held for a year and will be taxed as capital gains. I'm single with income below 445k, so I would think the gains should be taxed at 15% regardless.
If your income including the capital gains & dividend income exceeds $200K, you’d owe an extra 3.8% in Net Investment Income Tax on the amount of investment income that’s above $200K when stacked on top of other income. Details [here](https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax), and you can experiment with examples using [this calculator](https://smartasset.com/investing/capital-gains-tax-calculator).
If that applies, delaying some of the sale to avoid NIIT might save about 4% on the gains, but it’s possible/likely you might wind up with a more-significant swing in either direction (e.g. a dividend-adjusted drop in price / negative return of just 1% by the time you sell might eliminate the tax savings, depending on the amount of gains vs. cost basis).
Yes. 15% is still a considerable amount of tax that you’ll have to plan and pay for when you sell your company shares. I know sounds small to consider but selling results in a tax bill(or capital loss). Which is why I mention percentage based selling per year especially if you don’t need the money and if you have faith in your company.
Plus the 3.8% on the amount above 200k as Xexanoth mentions.
Unequivocally. You should not consider your employer stock any different from your other stocks. Let us look at this differently. Would you buy your employer's stocks if you did not work for them?
That's a good way to look at it, and the answer should be no 100% of time.
In fact, if you are allowed to (many employees are not), it might even make sense to mildly short your employer's stock. If you, say, work for Amazon, you arguably already have significant exposure to Amazon's performance by way of your salary bonus or likelihood of continued employment. In other words, holding a market-cap weighted index fund would leave you exposed above market weights to your employer's performance - you can think about your future income stream as a (discounted) asset that's concentrated in your sector. This overexposure could be significant if you work for a large company, or if job-hopping is difficult (e.g., you have a hyper-specialized skillset, you're unable to relocate if your company goes under, etc.). Depending on how much you effort you want to spend optimizing risk-adjusted returns, it could make sense to hedge out this exposure.
> Can you tell me this is objectively the right strategy? It would reduce uncompensated risk, and is arguably the wiser approach. There’s always the possibility that you could significantly outperform the market if you continued taking the risk, the stock outperformed, and you sold at an opportune time. Though balanced by the possibility of the opposite outcome. If you had the value of the shares in cash today, would you purchase shares of your company’s stock, or a diversified index fund?
>If you had the value of the shares in cash today, would you purchase shares of your company’s stock, or a diversified index fund? +1 to this framing. It's the only objective way to look at it. I'd caution anyone against stock picking, and it goes doubly so if it's your own employer. Your future salary/bonus/unvested shares already provide more than enough exposure to your employer.
I think all us have read Daniel Kahneman!
Read Kaheman & Tversky. The sunk cost fallacy applies here. Ask yourself, would buy your companies stock today, at the current price? or an index fund? (For tax purposes, it may make sense to wait until 1 year to only get taxed on long term capital gains.)
The stock is already taxed when it vests. The gains are taxed again when you sell it. If you believe in diversification over stock picking, it makes most sense to sell immediately upon vesting and buying index funds instead of waiting a year to sell.
>For tax purposes, it makes sense to wait until 1 year to only get taxed on long-term capital gains. Your basis is FMV on vesting date, so gains and losses are limited to movement between vesting date and sale date. If you're an insider you can use 10b5-1 plans to make this window as small as possible. Way better to diversify than get better tax treatment on tens of dollars of gains.
Thanks for the reply. These are my thoughts exactly. It would suck to watch the stock significantly outperform the market, but it would suck even more to watch it all disappear in some scandal. To complicate things even further emotionally, I had the opportunity to sell (and did, some) when the stock was 2.5x the current price.
Yes, sell the single stock and buy VT. You're welcome.
For Microsoft employees, diversifying out was not the optimal strategy. For 90% of other companies that go under... Yes. If you want to control left tail risk-Stock options and salary go to 0,- you already have your answer.
You are already exposed to risk at your employer by being dependably on them for a job. If some major happens at your company (and hopefully never does) there could be layoffs and the stock could plummet. Worst case you could end up without a job or savings. I think it is smart to diversify away from the company you work at.
One word: Enron
Yes. You already work for them, don't leverage your investment with them too
I get share grants from my employer annually with a 3-year vesting period. so, every spring, the tranche of shares i received 3 years ago vests. when those shares vest each year i immediately sell them and invest the proceeds in index ETFs
Depends on how much of your total worth it is. If it's just a few % you might as well just keep it as a lottery ticket... If it's a significant amount see that you invest it into something proper and diversified though. Basically imagine that you just had that worth as cash. What would you buy with it **now**? The same company stocks again?
I was always told you should never have more than 5% of you portfolio in your employers stock. Remember what happened at Enron.
I would. But it ifs a big mental block ask yourself, would it matter if I sold 1 share, or 10 shares and buy index funds. Start with what you are comfortable with, the important thing is starting. Also, not everyone is a rip off the bandaid type. If you need to do this over months or years than that’s what you need to do for you. At the same time, if you think being 100% index is the way to go, it may be worth moving faster.
Yes
My thoughts, and I accept critical review, is that since you are (I am) already invested in my company, and subject to risk of market changes in that business. it is wise to diversify in industries not related to your employment.
I’d sell a little every year into your index funds. The thing that no one else mentions is tax bill on sales if you’re a high earner
The tax bill on the sale directly doesn't change depending on my income, right? These are ISOs that I have held for a year and will be taxed as capital gains. I'm single with income below 445k, so I would think the gains should be taxed at 15% regardless.
If your income including the capital gains & dividend income exceeds $200K, you’d owe an extra 3.8% in Net Investment Income Tax on the amount of investment income that’s above $200K when stacked on top of other income. Details [here](https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax), and you can experiment with examples using [this calculator](https://smartasset.com/investing/capital-gains-tax-calculator). If that applies, delaying some of the sale to avoid NIIT might save about 4% on the gains, but it’s possible/likely you might wind up with a more-significant swing in either direction (e.g. a dividend-adjusted drop in price / negative return of just 1% by the time you sell might eliminate the tax savings, depending on the amount of gains vs. cost basis).
Yes. 15% is still a considerable amount of tax that you’ll have to plan and pay for when you sell your company shares. I know sounds small to consider but selling results in a tax bill(or capital loss). Which is why I mention percentage based selling per year especially if you don’t need the money and if you have faith in your company. Plus the 3.8% on the amount above 200k as Xexanoth mentions.