My Company's Stock Price Is Down, Now What? - Part 2
It’s a natural reaction to hold onto your company’s stock while the price is down. You might, however, be curious about some of the tradeoffs of waiting for the share price to recover. In this post, I’ll walk through several pros and cons to consider and share ideas for those that decide to hold.
Let’s start with the pros:
Potential Recovery – To state the (necessary) obvious, if a person believes that the stock is undervalued / oversold and has strong long-term growth potential, selling at a low runs the risk of missing out on that recovery. FOMO is a powerful thing.
No Taxes Due – There is no tax bill from doing nothing in this scenario. Continuing to hold onto the investment (aside from dividends, if any) will not incur a tax liability. Perhaps the only thing more painful than watching your stock value drop is paying more in taxes along the way!
Confidence in the Company – As a person who spends a great deal of their time and energy contributing to the company, you may have a high degree of confidence in the organization, its leadership, and its potential in the future.
Internal Pressure – Many of my clients feel a sense of duty or obligation to hold a certain number of shares in their company. Others, particularly those required to obtain authorization prior to selling shares, may worry they will not be viewed as a team player if they sell.
But what about the cons?
More Losses – The stock may have further to slide, and you may see your balance drop even further. For example, if a company is in a declining industry, has poor management, or is facing disruption from competitors or new technology, the stock may be unlikely or slow to recover. Cutting one’s losses and redeploying capital into other opportunities may be a better tact.
Opportunity Cost – Missing other opportunities, though often difficult or even impossible to quantify, is very real. You only have so many dollars to put to work on your behalf, and funds tied up in your company stock can’t be used for other purposes.
Prolonging Risk – Owning concentrated stock increases the overall risk of your portfolio. This is not rocket science, of course. However, the longer that concentration lasts, the more unpredictable the outcome – either good or bad.
Additionally, the longer you own a concentrated stock, the more tail risk you take on. In short, tail risk is the chance for extreme and unexpected events that – when involving a concentrated stock – can drastically change your financial future.
Lack of Control – Naturally, you cannot control the price of your company’s stock. When a single stock has a disproportionate impact on your portfolio and net worth, this lack of control creates stress that grows. For many people, the lack of control over such a significant part of their lives simply isn’t an appealing or desirable way to live, even with the upside potential.
Emotional Toll – I’ve worked with many clients that own their company stock and, time after time, have seen the emotional rollercoaster that comes with owning stock in the same company that pays your mortgage. For some – though certainly not all – minimizing that rollercoaster can result in better financial outcomes and a more enjoyable life.
If you’ve decided to hold onto some or all of your stock, below are several ideas to keep in mind.
Form a Game Plan for Recovery – It seems so obvious and easy, but I often see this step overlooked. In client conversations, that begins by getting crystal clear on the following questions:
What is the minimum price at which you are comfortable beginning to sell again?
What price is necessary to achieve your goals?
Is there a point at which a price drop would derail your future?
Don’t Forget Your ESPP – If you have ignored or underutilized your company’s employee stock purchase plan (“ESPP”), now may be a good time to review whether an adjustment to your contribution makes sense. Many qualified ESPPs have the unique benefit of offering a lookback feature in which you buy at the lower price on the starting and ending date of the subscription period. If the stock price recovers during the period, you may be able to benefit by buying shares at the lower beginning price. Conversely, if the price is lower at the end, you have the option to sell the shares and harvest the discount – commonly 10% to 15%. Not bad!
Be Aware of Additional Stock Vestings – As part of your employment, your compensation package likely includes additional vesting grants – whether that is in the form of Restricted Stock Units (“RSUs”), stock options, or another type. While not selling shares you already own is an understandable tact, that same logic may not extend to shares you’ll either receive or purchase in the future. For example, vesting RSUs are tantamount to a bonus paid in the form of shares. You are taxed at ordinary income rates upon vesting, there are essentially no tax benefits to holding, and vestings add to your concentration. Under most scenarios such as this, expecting to sell newly acquired shares is often the smart path.
Stay Mindful of Wash Sale Rules – If you decide to sell shares along the way, there may be a loss that can offset taxes this year. However, if you receive or buy additional shares – even through an RSU vesting or by exercising options – that event can run afoul of wash sale rules and, at least for a while, negate the benefits of taking a loss for tax purposes. Selecting the right lot (shares purchased at a specific point in time) is always an essential step for tax optimization, but it becomes all the more important when there is the potential for a wash sale. In short, understand wash sale rules and ensure that your sale strategy factors them in.
Selling Covered Calls – Selling call options to generate income while waiting for the stock price to recover can make sense in certain situations. Among other things, it requires that:
A person has a target price at which they are comfortable parting with the shares,
A market exists to support using publicly traded options for this purpose,
A willingness to invest the time and energy into learning and deploying the strategy (including the ‘gotchas’), and
An employee is not prohibited by their company from using publicly traded options.
To be clear, this approach demands a sophisticated understanding of public options markets, which are complex and should only be considered as part of a larger deconcentration strategy. Selling covered calls is not right for all individuals or circumstances. However, the strategy can be valuable and is worth asking your financial planner about if you have a concentrated position. I'll discuss covered calls further in Part 3 of this series.
Conclusion
The decision of whether to hold a down stock is a tough one, and a process I’ve walked through with clients countless times. In many instances, holding is a reasonable approach that retains the upside potential of the company. The keys, in my experience, are:
A deep understanding of the pros and cons,
A tangible sense of the potential risks and rewards,
Clarity on what these things mean for your life goals and future, and
If you decide to hold, considering all the tools available to you.
In the next installment of this series “My Company’s Stock Price Is Down, Now What?” I’ll discuss tools that exist for hedging risks. Stay tuned for more to come!
Disclaimer: This is a blog post and is not intended as investment, tax, or legal advice. Please do not misconstrue it as any of those things. The content is intended for informational purposes only and should not be relied upon for making investment or financial decisions. Everyone’s situation is different; obtaining guidance from licensed, experienced professionals prior to taking (or deferring) any action is advised.