By: Andrew Rosen, CFP®, CEP®

I haven’t brushed my hair in almost three months! (I’m kidding…or am I?)

It’s interesting how many of these quirky milestones I’ve realized. Every week, I mutter some absurd notion I never thought I’d say. I haven’t been to a restaurant, hugged another human outside of my family, worn dress shirts and slacks, or stepped foot in my own office since mid-March. Earlier this year if you told me these things were going to be true, I’d assume something crazy happened. Well, I guess it really has. (Oh, and while I write this, my daughter is riding a hoverboard!)

One of Diversified, LLC’s specialties is working with executives at many different fortune 500 companies. Many of them receive a fair amount of their compensation in the form of stock options and restricted stock units. These can be fantastic little perks, but are often a large portion of executive compensation.  While the stock market was on a record run up the last decade, these stock compensation vehicles have created a lot of wealth for our clients.

I’ve seen clients buy million-dollar homes, put their kids through college, and even retire, heavily because of what these concentrated company stock positions have afforded them. They really can be a great benefit to the upper level employee’s compensation program.

The past few months, however, shows another side of these company stocks, a dark and unpleasant side that many of us have forgotten about. Sometimes these stocks come crashing down. With the heavy concentration of one’s wealth in a single holding, it can have some really unsightly consequences.

How would you feel if you worked at American Airlines, Harrah’s casino, or Hertz? There are a lot of companies who, during an event like the past few months, will get set back years. Some even may close permanently. How would an event like this affect your financial plan and security? It may be too late for some of you and your only option is to wait it out, but how can we better position ourselves for the future?

Here are some things to consider moving forward, as it pertains to downside protection of your company stock.

  1. Diversify – Hmm… I guess you don’t have to be a mind reader to understand why we named ourselves Diversified. The entire essence of diversifying is to protect one’s financial portfolio from a single crippling event. I think it’s important that this basic rule stays in the back of your mind always when handling corporate stock awards.
  2. All stock awards aren’t created equal – Stock awards come in many shapes and sizes. They can be stock options, restricted stock units, stock bonus, employee stock purchase plan, and even performance shares to name a few. It’s important to look at these all differently, as they don’t carry the same risk/reward. For instance, an RSU is a one-to-one relationship. Thus, the upside and downside of holding is completely contingent on the company’s ability to grow faster than the general market. Whereas a stock option is a leveraged relationship, meaning a dollar movement in a stock option can have a much larger impact than in an RSU. What does this mean? Well, I’d sell an RSU way before I sold a stock option.
  3. What percent of your net worth does this stock represent? – There’s a big difference if this company stock is 5% of your net worth or if it’s 30%. Regardless of how much, you should look at it through the spectrum of how it weights to the rest of your portfolio. The greater the percent, the more care and consideration should be given to de-leveraging.
  4. What is going on with your company? Is your company a startup or in talks to get bought? Or are they simply humming along nicely? No one knows your company better than you; therefore, you’re likely in a pretty good position to believe in the future growth potential or not.
  5. Are you too close to your company? Are you possibly too close? There may be blind spots or a false sense of growth due to your loyalty. Just like sometimes we don’t see the obvious in our own lives, I’ve seen the same happen when it comes to company stock.
  6. What risk you’re willing and able to take? We often preach there are two types of risk. There is risk you are willing to take and there is risk you are able to take. Really let that sentence sink in for a minute, because these two things aren’t always aligned. When viewing your company stock, it’s important for you to determine your risk level and then determine if that level of risk fits in with your overall plan.
  7. What does this money mean to you? Is this money your dream beach home or your kid’s college? Is it retirement or would it just be nice to have? I find it very helpful to take a step back for a moment and discuss what this money represents. This can go a long way in helping you really assess the level of exposure that’s right for you.

Tough decisions

There is no 100% right answer when it comes to how to view the risks associated with your company stock. Hopefully, some of the above can help you frame your thinking at the very least. I also think some of these items tie into a greater risk conversation in general.

At the end of the day, a very concentrated position in your company stock can be a great thing and a risky thing. When the unforeseeable things happen to your company, remember that they are just that—unforeseeable.

Take care when handling this stock, so you don’t find yourself also saying things you never thought you would have three months ago either.

In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. Andrew loves helping others by spreading his knowledge on finance, investments, and the pursuit of happiness/fulfillment. He writes nationally recognized, weekly blog posts on these topics and is a regular contributor to Kiplinger. Andrew has been published in The Wall Street Journal, Barron’s, Financial Advisor Magazine, US News & World Report, USA Today, CNBC, along with many other publications.

For more information or to book a consult with Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Andrew Rosen, CFP®, CEP®
Kyle Hill, CFP®
David Levy, CFP®

Financial planning and Investment advisory services offered through Diversified, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC. Some associates of Diversified, LLC are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.