Financial planning can be tricky. It doesn’t need to be when dealing with company stock. 

TLDR: With limited exceptions, if you want to maximize the long term growth of your portfolio, you’re better off selling your company stock as soon as the shares vest (are eligible to be sold) and reinvesting the proceeds in a low-cost, globally diversified portfolio.

This is one of the most common questions I get when onboarding a new client so I thought a quick post was in order. In this post, I’ll assume that you have received compensation in the form of stock from your employer that has already vested or will vest in the near future. I’ll also assume that your goal is to maximize your long term return on this money. In plain speak, you can sell your company stock, but you’re not sure if you should.

This decision boils down to answering 3 questions:

1. Will owning a single company’s stock maximize my expected rate-of-return?

2. Does it make sense to invest in the same company that pays me my income?

3. Should the money in this account be invested in a 100% stock portfolio?

Will owning a single company’s stock maximize my expected rate-of-return?

No. Without diving into the extremely large amount of academic research behind this answer, it’s simple enough to say that it has been demonstrated that the best approach to maximizing an investor’s long-term expected rate-of-return is for that investor to own a low-cost and globally diversified basket of stocks. Sure, with the benefit of hindsight, your company could end up being one of the few whose stock outperforms the broad market over the next X years. However, the odds of that are slim and they get slimmer the longer the investment time-frame we look at. Even then, the investment “ride” required to earn that return is usually so full of wild highs and scary lows that most investors aren’t able to stay invested to actually realize those handsome returns. When it comes to maximizing your long-term expected investment return, the preferable option to owning any single company’s stock is to instead diversify your risk and own many stocks across different industries, sectors, and countries. In other words, don’t put all your eggs in one basket!

Does it make sense to invest in the same company that pays me my income?

No. Your ability to thrive and earn a good income is already tied to your employer’s good health and future prospects. The stock price of your company is also a reflection of both, your company’s performance today and its prospects for success in the future. Regardless of how well your employer’s stock has performed in the past or your expectations of its future performance, it is never a good idea to invest your money in your employer’s stock. Imagine a scenario in which your employer hits hard times or enters an environment where the future doesn’t look as promising. The company might decide to downsize and layoff some employees. This happens all the time. The stock price of a company in this situation usually reflects these challenging times by going down in price, sometimes by a lot. If you lose your income or you’re forced to take a significant pay cut, the last thing you want is for your investment portfolio to have gone down significantly in value at the exact same time. Enron and Lehman Brothers are good examples of successful companies that seemed to nearly everyone to be outstanding firms with great track records. Right up until they weren’t. Both companies were also famous for having employees who owned a disproportionate amount of company stock because they felt their respective firms were sure to continue outperforming the broad market. When these firms went under, many of their employees lost both their jobs and a significant portion of their life savings all at once. History is replete with other similar examples. In short, this kind of scenario has the potential to be financially devastating.

Should the money in this account be invested in a 100% stock portfolio?

For most people, the answer is probably not. However, this all comes down to your personal circumstances and risk tolerance. On occasion, a low-cost and diversified portfolio 100% invested in stocks can be appropriate. Generally, though, I’ve found that most investors are better suited and more comfortable investing their taxable money in a balanced portfolio with some percentage invested in a low-cost, diversified stock portfolio and some percentage in short-term, high quality fixed income. Doing so ensures a less volatile investment experience by smoothing out the peaks of the good times and the valleys of the bad ones. Ultimately though, how much you decide to allocate to stocks vs. fixed income in your portfolio depends on many factors including, but not limited to: what other taxable accounts you have, how much cash you’re sitting on, how much and what types of debt you have, your income level, your spending vs. savings rates, the company you work for…etc. And of course, how much you are comfortable losing without panicking and selling out of your portfolio. All of these and more need to come together to determine the target stock/bond ratio that is right for you.

In Summary

From a return standpoint, holding your company stock is suboptimal. From an overall financial wellness standpoint, owning your company’s stock is unnecessarily risky. From an investment portfolio risk standpoint, holding your company stock forces you into a single-stock allocation with a high enough level of risk to render it inappropriate for most investors. Looking at this question differently, if you had received cash instead of shares of company stock, would you then have gone out and bought your company’s stock with that cash? For most people, the answer is, “no”. This should tell you a lot.

So yes, you should probably sell your company stock. But before you do, be sure you’ve got a plan in place. Deciding to sell your company stock is the easy part. If you want to get the most out of this money, you’ll want to work with your tax pro to be sure you understand the tax implications of selling your shares. Once that’s clear, now the fun begins. What accounts are you going to invest the proceeds in? How will you invest them? What stock/bond allocation is appropriate? What holdings will you use and how often will you rebalance the account? If you’ve got these answers, go forth and prosper! If not, drop us a line. We’d love to help.

If you’re interested in learning more, please get in touch.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Robert Stromberg, and all rights are reserved. Read the full Disclaimer