Most people hold their RSU’s (Restricted Stock Units) too long.
By holding and not selling your RSU’s you’re effectively betting that your company’s stock will outperform alternative investments like other stocks or the overall market. You might be right, but that’s a big bet most people shouldn’t lay down. You’re also increasing your investment risk profile substantially.
Drinking the Kool Aid? Availability bias? Blind faith? Or simply, not optimizing your investment portfolio.
So I have a lot of friends who work at public companies in the Bay Area. In all of these companies equity in the form of RSU’s is a significant portion of compensation.
The vast majority of people I know hold their RSU’s long after they have already vested. In fact, their vested RSU’s are often a material portion of their net worth.
Punchline: You should sell at least some of your RSU’s on the day they vest. If you want to hold onto 10%, 20% or even 50%, fine. But holding 100% is likely irresponsible.
You can stop reading now and take my word for it. Or more detail follows…
Why sell my RSU’s?
There are two main reasons::
- Diversify your portfolio and lower risk.
- Maximize return.
Diversification
“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 maximize your chances 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 RSU’s, you are betting that your company will return more than alternative investments. THIS IS A BIG MISS.
If you live and work in the Bay Area and had the luck/privilege to work at one of the few companies that has experienced outsized returns (Nvidia and Tesla come to mind) then bravo. But why not own more than one? Own Nvidia, Tesla, Alphabet, Amazon and Apple. If you owned all five you would have returned 15x over the last 7 years. That’s an insane return.
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.
Taxes & Timing
There is a reason to sell on the day of vest. When your RSU’s “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 ~40% of the vested shares to pay taxes. So if you vest 1000 shares, you actually may only get 600 shares.
From that date forward the appreciation of those 600 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, you may as well do it on the vest date so there is little to no tax consequence.
Ping me with any questions at sean@hathawayfinancial.com