How to handle your RSUs may not be a concern for the past decade when the stock prices in the industry were almost always increasing. Now with the big drop in tech stock price, you may suddenly realize you actually do not have a clear idea of what your company’s stock prices are going to do and how long the current trend will persist. For those of you who couldn’t decide what to do with your RSUs, you may want to consider the following aspects:
Your Cash Flow Situation
I am sure you realize just how important cash is when seeing your co-workers getting laid off. Will you be able to get through three to six months with your current emergency savings? If not, those RSUs might get you there making your financial situation much more resilient. To help you make the decision, you can think of your RSUs as a cash bonus that varies in value in the shape of your company stock - if you get this cash bonus, will you hold it in your company stock or will you keep it as cash for now?
The Trend of Your Company Stock Price
I find sometimes people have a different “mental account” for their RSUs and do not watch their value as closely as their other investments. If you find your company stock price ended up at the same level as three years ago, ask yourself would you rather sell your company shares back then and use the proceeds to achieve a higher return elsewhere? If you were willing to do it back then, why are you unwilling now?
Your Company Stock as a Percentage of your Net Worth
The bigger the percentage, the riskier it is to keep the stock. For example, if 5% of your net worth is made up of company stock, then if the stock falls 20% you lose 1% of your net worth, but if it makes up 50% of your net worth, then you will lose 10% of your net worth. If your existing holding of company stock is already quite large, you may consider starting to selling the RSUs as they vest. Remember that even if you want to rush to sell your company stocks, you still need to follow your company rule of selling – so make sure you plan ahead of time.
Your “Rules” of Timing the Market
Market timing is probably the most difficult part among all other aspects. If you do not sell as the RSUs vest, that means you are challenging yourself with timing the market. Ask yourself if you are unwilling to sell at this price, at what price are you willing to sell? Let’s say you don’t sell your RSUs as they vest. You hold the stock in the hopes that the stock value will recover. In 12 months, the stock still hasn’t recovered its value. In fact, it’s worth less than it is today. What do you plan to do? So, if you want to have a chance of successfully timing the market, you need to have objective rules that dictate when you will sell. What are your rules now?
Your Risk Preferences
Incorrectly timing the market can lead to two results – 1) holding your company stock while watching it continuously decrease in value or 2) selling your company stock at vesting and then finding the stock price increasing in value— and both could bring you feelings of loss and regret. Which type of misjudgment in market timing do you feel more strongly about? Your answer may help you determine what type of risk you will feel more comfortably taking.
Your Financial Objectives and Constraints
If you need the money from your company stock to fund your financial goals, you cannot afford to risk it in a market you cannot predict. On the other hand, if losing that money does not affect your life and goals, then you can afford to take the risk of holding on to it. Is your company stock “icing” on your financial cake or is it the cake itself?
If your company stock has not become the financial cake itself yet, I would recommend you to plan to fund your core financial goals (such as living expenses, housing, retirement expenses, etc.) with the predictable salary and use your less predictable RSU income to fund your optional goals (such as travel, vacation home, etc.). Don’t forget that your RSUs are just numbers in your account before you use them to fulfill your and your family’s needs and wants in life, and your logic on how to handle your RSUs should never be solely based on the changes in stock price.
If you would like to discuss this or any other financial planning subjects with me but are new to my firm, let’s set up a FREE introductory meeting to get started!