If you’re a senior tech professional, chances are you’ve built up a good chunk of your wealth through equity-based compensation like stock options, restricted stock units, or stock grants. Concentrated stock positions can bring big rewards, but they also come with some serious risks. Managing these risks is key to keeping your financial future secure and reaching your long-term financial goals.
The Dangers of Owning Lots of Company Stock
Having a large amount of your wealth in just one stock, especially your employer’s, can expose you to several risks:
- Not enough diversification: This is the biggest risk. Imagine if this was the 2000s and you were working for Nokia, Ericsson, Enron or Worldcom. How much are these stocks worth now? If your company stock was wiped out, how would that affect your personal financial future?
- Double trouble: As a top executive with a lot of stock, both your paycheck and your wealth depend on your employer. If the company hits a rough patch and starts laying people off, you could be affected twice over.
- Emotional attachment: When you feel connected to your employer, it can be tough to make clear-headed decisions about when you intend to sell company stock.
- Tax headaches: Selling large amounts of company stock can lead to big capital gains tax bills.
Here are some tips for managing the risks and rewards of concentrated stock positions:
- Mix it up: Diversifying your portfolio is essential for reducing risk. Aim for a blend of indices, geographies, and types of investments (like stocks and bonds) to lower your exposure to any single company or industry, and create a well-rounded portfolio that matches your risk tolerance.
- Set a target: Decide what percentage of your portfolio you’re comfortable allocating to your concentrated stock position, keeping in mind factors like risk tolerance, financial goals, and overall diversification. Keep an eye on your portfolio to make sure it stays in line with your objectives.
- Have a plan: Planning when you will sell your stock can help you avoid making emotional decisions during market turbulence. Set price targets or time-based triggers for selling to stay disciplined and focused on your long-term goals.
- Ask for help: Managing concentrated stock positions can get complicated. Consider working with a financial advisor who knows the ins and outs of equity compensation plans, and can help you create a personalised plan that fits your financial goals and risk tolerance while minimising tax liabilities.
If you’d like to chat about how your stock position might affect your financial planning, feel free to get in touch.
- This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
- The value of shares can fall as well as rise. You may not get back the full amount invested.