Most executives hold their RSUs (Restricted Stock Units) too long after vest.
By holding and not selling your RSUs you’re effectively betting that your company’s stock will outperform all available alternative investments: other stocks, companies, ETF's, etc... You might be right, but that’s a big bet most people would not make with careful thought. Why? You're increasing portfolio risk and concentration substantially.
Most of my friends (and clients) work at public companies in the Bay Area. In all of these companies equity in the form of RSUs is a significant portion of compensation.
The vast majority of people I know hold their RSUs long after they have already vested. In fact, their vested RSUs may often comprise a material portion of their net worth.
Punchline: You should sell at least some of your RSUs on the day they vest. If you want to hold onto 10%, 20% or even 50%, fine. But holding 100% is likely not optimal in a long-term investment strategy.
Why sell my RSUs?
There are two main reasons::
- Diversify your portfolio and lower risk.
- Maximize return.
“Diversifying Well Is the Most Important Thing You Need to Do in Order to Invest Well” -- Ray Dalio - Founder Bridgewater Capital
Here is more of Ray’s very easy to understand reasoning around diversification.
Nobel prizes have been awarded to researchers, economists and academics on the benefits of diversification. There is no reason for me to go deeper on it here when you can read about it everywhere. In short though: Diversification increases returns while simultaneously decreasing risk. Win. Win.
It should be intuitive that holding investments in five companies is better than holding stock in one company if you want to minimize potential for massive loss and maximize your opportunity for a comfortable retirement.
Finally, holding your employer’s stock concentrates risk from a paycheck and investment portfolio perspective. You’re reliant on your paycheck and appreciation in your company’s valuation.
Maximize Return
If you hold your RSUs, you are betting that your company will return more than alternative investments.
What do you mean?
If you live and work in the Bay Area and had the luck/privilege to work at one of the relatively few companies in the world that has experienced outsized returns (Nvidia, Tesla, Mag 7, etc...), then you are very fortunate. But why not own more than one? Own Nvidia, Tesla, Alphabet, Amazon, etc... If you owned all 7 you would have returned 950% over the last 7 years. That’s a phenomenal return and it's relatively diversified.
BTW, I know I can pick the companies and make the data/conclusions do anything. Point is, it's hard to pick the super winners, and you’re generally going to maximize wealth and sleep better with a basket of companies.
Below are the Returns of Mag 6 (I removed Nvidia due to its skew of the average and showed year 7 with and without Tesla for similar reason).
Taxes & Timing
There is a reason to sell on the day of vest. When your RSUs “vest”, they actually become unrestricted and are fully transferable shares of stock. The vesting day is also a taxable event. You are taxed on the day of vesting at ordinary income tax rate. Most companies will withhold 35-40% of the vested shares to pay taxes. So if you vest 1000 shares, you actually may only get 650 shares.
From that date forward the appreciation of those 650 shares will be taxed as either short-term (held less than 1 year) or long-term capital gains. So on that day - the vesting day - you can trade those shares out for shares in other companies that will also be taxed at capital gains.
The point here is that if you’re going to diversify and sell some RSUs the time to execute that strategy is near their vest date to minimize variance in stock price between the vest day and sell day.
Ping me with any questions at sean@hathawayfinancial.com
