To My Friends Accumulating Company Stock
a.) “The stock has done well, so I’m going to hang onto it”
b.) “I’m not sure what to do, so I’ve ignored the responsibility and have done nothing”
c.) “I’m not sure what to do, so I’ve leaned on my co-worker for advice”
These statements are the three most common responses I hear when inquiring about one’s company stock plan.
Your company stock represents familiarity. It probably represents a source of pride. If you’re lucky, it has made a meaningful contribution to your overall net worth. Due to these emotional attachments, it can be difficult to start selling the stock.
Decisions around how to handle your company stock are very personal. Overall planning needs, taxes, stock plan type, risk tolerance/capacity are just a few of the factors that must be accounted for.
Consider the following research findings from JPM Asset Management:
The Russell 3000 is an index comprised of large, mid-sized and small capitalization stocks. It accounts for roughly 98% of the invested domestic stock market. Using a database of 13,000 individual stocks that belonged to the Russell 3000 at any given time during the 1980-2014 period , they learned:
- 40% (~ 5,200) of the individual stocks in the Russell 3000 suffered a 70% drawdown. Not temporary declines, but permanent declines that were not substantially recovered. Note that an even larger number of stocks suffered less of a drawdown (i.e. 40 or 50%) that they did not substantially recover from.
- The median stock underperformed the market over that timeframe with an excess return of (-54%.) Holding the diversified index itself would have provided superior returns.
- These figures were not unique to certain market sectors or specific periods in the business cycle. There is distress in everything from healthcare to energy, expansion to recession.
- Only ~ 7% of stocks had returns over two standard deviations greater than the mean. In other words, a very small number of stocks were extreme winners.
Think about those numbers. A 2 in 5 chance of having a 70% + drawdown that you never really recover from. Manageable if the stock makes up a fraction of overall net worth. Debilitating if the stock makes up a substantial amount of overall net worth..
Moving forward, I’m not sure what camp your particular company stock will land in – nor does anyone else. Historical odds suggest it is extremely unlikely you’re sitting on the next Google or Amazon.
Of course, superior performance over the previous five years will not automatically translate into superior performance in the future. Decisions should be evaluated using probabilities instead of a recency bias.
Do not confuse familiarity with safety - holding an individual company stock is risky. The good news is, it’s a risk that can be diversified away. As the old saying goes, “Concentrate to get rich, diversify to stay rich.”
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Source:
JPM Asset Management: Eye on the Market ‘The Agony & the Ecstasy”
