Cashing Out RSUs: Dodging Tech Stock Disasters by Diversifying
You probably hear a lot about diversification. Right?
Nobody particularly wants to hear more about this, and honestly, I don’t want to write about it again, it’s boring for me. But I’m going to do it anyway, because it’s important, and when people don’t get the message, their financial health can suffer.
Every so often I hear another “failure to diversify” story from someone who didn’t sell their company stock before the price dropped significantly. Unlike those who regularly sell RSU shares upon vesting, these individuals have potentially lost a lot of money if the company’s stock price doesn’t recover before they need to sell their shares. To put it simply, that stinks. They have potentially just added several years to their work-optional endpoint.
Most of the time the reason this happens (holding the stock and failing to diversify) is simple inertia. People are busy and don’t get around to it. It’s not a priority. And it doesn’t seem to matter much, because the stock is doing fine (right up until it isn’t).
Inertia is never a good financial strategy. Making the decision about what to do with your vested RSU shares proactively and regularly needs to be a priority if your goal is to grow and protect your wealth.
A good way to get clarity about this decision is to ask and answer this question: If the company paid you a bonus in cash, would you immediately invest the cash in your company’s stock?
Most people wouldn’t. And I bet you wouldn’t either.
If you wouldn’t invest your cash bonus in stock, then why hold on to the stock? You’re making the same investment decision, just framed a little differently. In one case, you’re given the stock and you let inertia make the decision for you to keep the stock. In the other case, you’re given cash and have to actively decide to buy the stock, and my experience says you probably wouldn’t do that. The point is to be proactive. Make an intentional decision to safeguard your net worth.
Another reason people may hold on to their company stock is they think, or usually they feel, they know something about what’s going to happen with the company stock price in the future. I am always skeptical, and nearly always right, about people’s ability to skip ahead on the timeline and see what comes next in the universe. Even professional investors have terrible track records in this area. If anyone could truly tell what was coming next, they’d already be billionaires, and they wouldn’t be sharing the information with you.
If you think you can predict how your company’s stock will perform in the future, think again. It’s extremely difficult to outguess the collective judgment of all market participants. Stock prices generally reflect publicly available information about a company’s prospects, and even professional analysts rarely get stock price forecasts right.
You don’t have to rely on a single company stock to pursue your financial goals. A proactive approach often includes reviewing your options and considering diversification, such as investing across broader stock and bond markets, to help manage risk.
Small U.S. stocks have earned 11.8% per year on average over the last nearly 100 years, and large U.S. stocks have earned 10.4% per year on average over that time period. Bonds have earned about 5%. Investors expect strong investment returns and companies generally aim to deliver financial results that meet those expectations so they can raise capital in public markets.
Historically, markets have delivered positive returns, but future performance is never guaranteed. Diversification can help manage risk compared to concentrating in a single stock. While some people do get lucky holding one company’s shares, relying on luck is rarely a sound strategy. In my experience, selling RSU shares and investing in a diversified mix of securities can help manage risk and support long-term financial goals.
Savant Wealth Management provides comprehensive wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you’d like to learn more about strategies for managing RSUs, we invite you to, schedule a complimentary consultation.
Bruce R. Barton
Managing Partner / Financial Advisor
CFP®, CFA®, MBA