Next Play
I had someone say to me a few weeks ago something like this. "I did the math on had I not sold any 'company x' stock, and the number made me sick. I could retire now." Essentially, the stock has done so well that the opportunity cost of those sales looked like a bad decision in retrospect. It was backwards looking off of a fairly unprecedented period of performance.
Soon thereafter, I saw this post from Ben Lang.
"If you joined Nvidia 5 years ago as a mid-level product manager with an annual $70K stock grant over 4 years, just that initial grant would be worth ~$10.6M today."
Yikes. Does this mean early equity should never be sold? No, it does not. Because for every story like the one above, there's hundreds of other companies that don't work out that way. While it's historically true that the stock market does prosper over time, most individual stocks do not. Maybe right out of the gate, maybe down the road a bit. But most will stumble.
So here's what I would do, or at least think about, when presented with equity decisions as part of a compensation package.
“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.” – Ian Wilson
I've been on a little league diamond all summer, and can't count the number of times I've had to tell nine year old boys to make the next play. If you just roped a double into the gap (good), or made a throwing error (bad), it's critical to move forward and do the next best thing. Learn, and move on. So whether recent equity performance has been good, or bad, do the next best thing with the information at hand.
a.) Take something off the table, and do it regularly
The speed at which this should be done is the risk management component of the decision, not whether or not to sell. If you want to take on more risk, then sell less of a position, but don't get away from doing things on a regular schedule. We've seen people get away from selling because of significant outperformance, only to be caught holding more than they want to be for a nasty drawdown. Successful long-term investing is having the capacity to absorb manageable damage over a long period of time. The more concentrated in a position, the harder it is to absorb damage if it comes.
b.) Have perspective
A stock may be 20% off from the month prior, but has still doubled over the last six months. Broaden your horizon to increase the likelihood of a better decision. Don't get stuck on what you could have sold something for last week.
Many employees have significant unvested stock when selling other shares. If you are haggling over whether or not to sell $50k of a position at a certain price, when all the while you have another $1.5m in unvested shares, I would argue you're being penny wise and pound foolish.
c.) Diversify
If your stock has done well, you may question why sell it to put it into a diversified portfolio. But you won't question why when the drawdowns take place. Remember, even some of the best companies in the world have ~ 75% drawdowns (see Netflix, Meta in 2022.)
d.) Plan for taxes
There may be capital gains, net investment income tax and/or ordinary income taxes associated with stock sales. Significant sales may generate the need to pay separate quarterly tax. For RSU's, selling the stock right away upon vesting should limit additional tax. Make sure other taxable investments are engaging in tax loss harvesting and consider a donor advised fund, which would allow you to potentially avoid capital gains tax on a stock sale and claim a deduction in the year the gift is made.
Hopefully, this provides a new wrinkle for considerations around equity sales moving forward. Just go make the next play.
--
The content in this article was prepared by the article’s author and is not intended to provide specific advice or recommendations for any individual. Voya Financial Advisors does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors.
