Selling restricted stock units is in your best interest. Picture this.
You had a good performance year, and your company decides they want to retain you. So, they give you a few shares to allow you to share in the success of the Company. Every company is different, but what is common is that these shares have a vesting period where the shares will be visible in your account, but you won’t own them yet. You have to stay with the company through the vesting period for ownership to be transferred. The system is designed to boost your performance. Your increased performance will drive the share price higher. More money for shareholders. More money for you.
Upon vesting, some employees love to keep their shares forever. Thinking that the share price will always move up. I believe you should sell your shares at vesting. Here’s why:
6. You Need the Money
Employer stock grants can be a great way to get ahead financially. Using the cash value you can sponsor a wedding, pay off a car, or remodel a house. Selling when the stocks vest allow you to capture the value at the time of award. No need to worry about market volatility because you got your money now.
5. You Paid Taxes on The Shares
I used to keep my shares of restricted stock because I thought waiting to sell would lower my tax bill. I was wrong. At vesting, I paid taxes at my federal income tax rate, not the capital gains tax rate. The way the government takes your money, it benefits you for the shares to go down a little bit. That way your tax liability won’t increase. Since the shares have already been included in your income, you might as well have the cash to show for it.
4. Your Leader Sells Restricted Stock
Every executive in a fortune 500 company has a plan for their stocks. You may notice at certain times in the quarter, you get a Form 4 notification signaling that executive shares have been sold. This doesn’t mean anything negative is going on with the company. It’s just good business practice to capture the value of your compensation. Considering that the average CEO makes 278 times the average worker, it might be a good idea for you to capture that value as well.
All Form 4 notifications are reported to the SEC. If you would like to look up the latest Form 4 notifications at your company, check out this article from the Motley Fool; or Go HERE, to look up the transactions. Make sure to click the radio button to include ownership.
3. You Will Get More Shares
Because Restricted Stock Units help drive desirable company behaviors (employee retention and increasing shareholder value), you can bet you will get more shares. If you don’t get another retention grant, you still have the remaining unvested shares. Selling your restricted stock units will allow you to gradually lower your position in company stock while using the unvested shares to profit from company growth. It’s a win-win. Diversify your position and share in the profits.
2. You Don’t Have a Plan
Without a plan you are more subject to emotional decision making. As a result, the emotional stock investor will buy high and sell low.
If you think your shares will always increase in value, you have another thing coming. Disruption of industries is happening faster. Eugene Klerk of Credit Suisse stated that the average lifespan of an S&P 500 company is less than 20 years. In the 1950s, companies had an average lifespan of 60 years. Technology is quickly changing the business environment. Your stock portfolio needs to adapt.
As a starting place, I recommend the Boglehead investment philosophy. It’s simple. You set it and pretty much forget it. If you don’t like that investment plan, it’s OK. You just need to answer a few questions:
- How much money do you have to invest?
- What is the duration of your investment?
- What is the goal amount and rate of return needed?
Once these questions are answered, you can determine which vehicle (stocks, bonds, real estate, or side businesses) is best for you. It will probably be a mix of all four.
With your plan in place, you can determine whether or not your company’s stock meets your investment criteria. If not, sell it and reinvest for your goals.
If you don’t feel comfortable doing this yourself, find a fee-only investment advisor HERE.
1. Your Career is The Investment
Your career is a bond fund that pays out over 50 years in the form of a paycheck. This bond fund is currently sitting in the hands of your employer. By keeping your restricted stock, you are handing your paycheck back to your employer. Keep the money. In this scenario, it doesn’t make sense to hand back your return. The company must earn a higher interest rate than your investment portfolio to justify keeping the stock. You should know what this interest rate is from your investment plan in #2.
Keeping your company stock decreases diversification. You take on increased risk by keeping your paycheck and investments in the same bucket. There is no downside risk protection. The market rewards you in good times, but will punish you in bad times. It’s possible for you to get laid off in an environment where jobs are scarce and the stock price is falling. Now you don’t have a reliable nest egg to fall back on.
Conclusion.
When you start investing in the stock market, start your long term investment plan. If you don’t, your success is left up to chance. Take a look at your portfolio. Get an advisor, if you need to. It’s time to sell those restricted stock units.
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