You hear stories of employees at tech companies becoming millionaires overnight, thanks to their share in the company’s stock. With the potential for a life-changing windfall, it can be hard to fathom having too much of a company’s stock in your portfolio. But where there is potential for great reward, there is potential for great risk as well.
If it’s been a while since you’ve stepped back and assessed your holdings, there’s a chance you may have a concentrated position in current or previous company stock. Equity compensation is an exciting and fairly unique option for tech employees. But you should consider its impact on your portfolio in conjunction with the rest of your financial wellness.
Below I’ve outlined what it means to be concentrated, how to assess your holdings, and three actionable next steps to consider with your advisor.
What Does Concentration Mean?
You probably already know that equity compensation is a normal part of compensation negotiations for some. Stock options are exciting and have the potential to grow your net worth significantly. But—as with most things in life—there can be too much of a good thing, so to speak.
Investors are often warned not to put all their eggs in one basket. This, of course, is easy in theory but becomes much more difficult for those who are often compensated in equity. Without intention, you may find yourself with a greater concentration of your assets in one company’s stock than is recommended for a diversified portfolio.
Having too great of a percentage of your assets invested in one company creates a vulnerability to risk that’s otherwise avoidable.
Tech companies, from small start-ups to established corps, can be prone to significant financial volatility. The more concentrated your portfolio is in one company’s stock, the more your financial well-being will rely on that company’s performance.
With That Being Said, Is Your Portfolio Concentrated?
An easy place to start is that one company’s stock shouldn’t make up more than 10% of your portfolio.
You don’t want one stock to have too large an influence over your total portfolio’s performance. Instead, it’s essential to strike a balance as you consider the “what if’s.” If that company’s stock were to take a dramatic downturn, you need to know that your portfolio can manage a hit.
This 10% rule of thumb is just that—a rule of thumb. Every individual will have different needs and risk tolerance. Someone nearing retirement, for example, may find 10% in one company to be too much. In comparison, someone else who has amassed a significant amount of wealth may have an opportunity to take on greater risk without impacting their larger financial goals.
These unique situations are where working with a knowledgeable financial advisor who understands your holistic financial picture and the nuances of equity compensation can help.
How to Evaluate & Address Your Portfolio
Working in the tech industry, it’s common to find yourself with a concentrated position in company stock. The good news is, there’s plenty you can do to help bring a better balance to your portfolio.
Understand Your Current Stock Accumulation
To address your concerns, it’s essential to start by answering, “How did I get here?”
Understanding how you’ve accumulated a concentration position in company stock can make identifying and preventing it easier in the future.
Start by jotting down important information regarding your equity compensation. Identify key dates such as vesting schedules or blackout periods.
Next, take some time to figure out the defining factors that may be impacting your concentration of stock.
Ask yourself important questions like:
- Am I aware of/concerned about the tax liability of selling my stock?
- Am I riding this out in hopes of greater returns?
- Am I going to accumulate more stock through promotions and raises?
- Am I avoiding making decisions because I don’t know where to start?
Consider discussing the answers with your financial advisor. Together, you can create a proactive plan for addressing and conquering your concerns.
Revisit Your Investment Profile
Once you’ve identified the role your company stock plays in your portfolio, it’s time to get to work reevaluating and readjusting your portfolio.
Keeping your entire financial picture and long-term goals in mind, you’ll want to revisit essential aspects of your portfolio, including:
- Asset allocation
- Risk tolerance & preference
- Time horizon toward retirement
- Tax efficiency
- Short- and long-term goals
Your portfolio needs to reflect your current comfort level and maximize the potential for long-term growth. It should be tailored to your unique goals, not dictated by an overabundance of one company’s stock.
Remember: Your stock awards should fit into your financial life, not the other way around.
The antidote to concentration? Diversification.
By selling a portion of a concentrated position and reinvesting in a diversified portfolio, you’re still invested and continuing to work towards your long-term investment goals—but lowering your chance of significant loss.
It can feel much more personal to sell your company stock than it does to sell other assets. But by maintaining an appropriate portion of that stock in your portfolio, you can still have some skin in the game. At the end of the day, your company shouldn’t be the sole arbiter of your net worth.
The potential tax obligation of selling stock can make it difficult to let go, but there are ways we can work together to minimize the impact taxes may have on your portfolio.
Once you’ve built a balanced, diversified portfolio, you’ll want to focus on creating a long-term equity compensation plan to help keep your diversification in check. This can include evaluating ESPP contributions, addressing bonuses in the form of equity compensation, and more.
Because I’ve Been There, I Can Help.
I’ve spent decades working in the tech industry—meaning I’ve found myself facing the same decisions you may be facing today. Balancing the great potential of company stock with the vulnerability of a concentrated portfolio is best managed by someone who’s been through it themself.
If you’re concerned your portfolio may be too concentrated, but you’re not sure where to start, I’m here to help. Together we’ll take a holistic approach to address your portfolio, meaning every aspect of your financial life is accounted for when making decisions.
Schedule some time to talk, and we’ll work through your options together.