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Should You Keep Your Company Stock Or Diversify?

Should You Keep Your Company Stock Or Diversify?

One might make you very wealthy, or not, while the other will probably help you reach your financial goals. Choosing the right option for you is not an easy task.

For anyone holding Google or Apple stock, last week was rough, with share prices for both falling by almost 10% in a number of days. If, on the other hand, you were a Microsoft or Amazon shareholder, last week was pretty good, with the latter increasing nearly 10% and the former maintaining steady growth since the start of the year.

Periods of high volatility for these company stocks generally mean lots of inbound calls from our executive clients, wondering whether they should now sell, either because they want to get out at the top of the market or avoid further losses.

In general, our (boring!) answer is that it depends. For many tech & pharma executives, stock options are not included in household budgets, meaning they are often left as they are. One of our first questions is to ask what, if anything, they could be directed towards, with long term financial goals (e.g. early retirement, holiday homes) or lump sum payments (educational funding or debt clearance) the most common answers.

Whether or not there is a purpose for these assets, it’s also worth asking whether they should be kept as they are or sold, and here you can find a divergence of opinion between the traditional Financial Planning industry and the newer Financial ‘Influencers’.

The former, of which we would consider ourselves part, encourages diversification, correctly noting that holding stock in the company you work for increases the risk-profile of that asset. If the company struggles and share prices fall, you may also find yourself out of work, losing both income and wealth in the same event.

Financial Influencers are, as I see them, far more aggressive in their outlook. They will sometimes acknowledge that prudent & diversified investing might make you rich, over time, but never to the same degree that holding a single stock can make you wealthy in comparison. In order to assess the truth of this, I have looked at the performance of a range of tech, pharma & med-tech stocks over the last decade, benchmarked against the US Stockmarket as a whole (S&P 500) and a common ‘60/40 Portfolio’. 

Share/Fund

10 Yr Performance

S&P 500

+249%

Microsoft

+1,0005%

Apple

+916%

Pfizer

-8.14%

Google

+397%

60/40 Fund

+63%

As you can see, the selected company stock outperformed the main equity benchmark by between 1.5 and 4 times over the decade and was between 5 and 15 times greater in returns than a 60/40 fund.

Does this mean you should always hold the company stock in entirety. No, of course not. Most of the above companies are in the table because they are profitable and successful. I included Pfizer as a warning, being a company a number of our clients work for, that it doesn’t necessarily mean this growth is guaranteed forever.

In general, executives in these types of companies hold both Restricted Stock (RSU) and Vested Shares, so an individuals total wealth, in time, is as much dependent on the future value of those RSUs as the current available liquid stock. Cashing out, prudently and appropriately, is a sensible hedge against excessive reliance on the company – particularly when it is being directed to a specific goal that can be quantified.

 

If you need guidance in understanding and managing your RSU's / Vested Shares, our team have the knowledge and the experience to help. Contact us today to schedule a free consultation 

 

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