For employees who receive stock-based pay, the task of managing Restricted Stock Units (RSUs) or options can be fraught with emotion. It’s natural to have strong feelings about the business where you spend much of your time and speculate about its future performance.
As with many issues in personal finance, there’s no “right” way to invest in your company’s stock because the answer depends on your situation. But there are healthy and not-so-healthy ways to approach the problem. Let’s take a step back from emotion and speculation. Here are 8 steps to consider when you’re exploring the role of an employer’s stock in your portfolio:
1. Start with your goals
This may sound obvious, but it’s helpful to know exactly why you’re investing before you start thinking about asset allocation. Many people find it useful to list their big-ticket future expenses — retirement, a child’s education, etc. — along with due dates and dollar amounts needed.
2. Quantify your squeamishness
Your employer’s stock is only one part of the equation. First consider your overall appetite for risk as it relates to your goals and your temperament. Many financial institutions including Fidelity and Vanguard offer quizzes to help you get a feel for how much volatility you can handle.
3. Pinpoint the overall blend
Once you know your goals and risk tolerance, you can find the mix of assets that fits your situation. This may include U.S. and international equities, bonds and alternatives such as commodities or real estate. If your main goal is retirement, you might want to research a sample of target-date funds for people in your age group to see how they’re constructed.
4. Have a written philosophy
The strategy of passive investing — buying and holding low-cost index funds — works best for the majority of personal investors. Picking any individual stock is generally riskier than investing in a broadly diversified index fund. Write down your policy concerning individual stock investments. Don’t make an exception for your employer based on personal bias.
5. Understand laws and corporate policies
Ask your employer if you're subject to insider trading policies or other regulations that affect your ability to buy or sell the stock. Remember that you may never trade based on privileged or non-public information. When in doubt, speak with a qualified attorney.
6. Develop a tax strategy
Meet with an accountant or do your own research to develop a tax-efficient trading strategy. The size of your tax bill can vary a lot depending on when and how you sell.
7. Know how much space belongs to company stock
After picking an asset blend and settling on your philosophy, you’ll know what percentage of your portfolio — if any — should be dedicated to individual stocks and to U.S. firms in particular. Your employer’s equity lives within this space.
Rebalance regularly in accordance with your personal tax strategy. This can be painful if the shares are doing well, but it’s essential to maintaining your desired level of risk.
There’s no sure-fire solution for investing in your employer’s stock because the right approach depends on your situation. Having said that, it’s critical to distance yourself from emotion and speculation. Instead of buying or selling shares based on expected performance, first consider your personal goals and risk tolerance. A strong asset allocation model takes some of the guesswork out of managing equity, allowing your employer's stock to serve as one slice of a balanced portfolio.