One of the biggest planning items we deal with for our clients is how to handle company stock. Clients who work for publicly traded companies typically receive stock as a part of their compensation package. Or they have the chance to purchase company stock at discounted levels through an employee stock purchase program (ESPP). As we’ve written before, we generally recommend selling any company stock as soon as you can. In this article, we’ll look at the performance of our client’s company stock prices and see how that general advice stacks up.
Why do we recommend selling company stock?
In many cases, your employer controls most aspects of your financial and personal life. For example, your employer has a direct impact on the following:
- Total earnings
- Where you can live
- Who you spend the most time with (co-workers)
- Health insurance options
- How much time you get to yourself
- Retirement (through 401(K) matching policies, etc)
With your employer having that much control over your life already, why give them anymore control? But when you hold onto your company stock, that’s exactly what you are doing; now your employer’s stock is impacting your net worth in greater ways.
A big drop in a company stock price can have a negative affect on corporate culture at publicly traded companies. Sometimes such share price declines are the result of poor corporate results which can then be followed by restructuring and layoffs. So not only is the share price down, but so is your job security. When you sell your company’s stock you at least get some aspect of control back.
What if the stock price goes up without you? That’s great! Because it’s not going up without you… it’s going up with you! The share price is likely going up because of the company’s overall strong corporate performance. That scenario can lead to increased compensation as the company pays out higher wages to keep the talent that is helping them perform well. So our baseline advice remains that most employees who have company stock should sell it.
How have our client’s stocks performed?
We have clients at 17 publicly traded companies. For privacy reasons, we are not sharing the names of any companies at which our clients work. So in the performance graphs below, each company is simply noted as “A, B, C” etc. We looked at the performance of the 17 companies our clients work for and then compared that to a broad market ETF, Vanguard’s VT. Our logic is that most individual stocks do worse than a broad market index. So you should just sell your company’s stock and invest in the broader market instead.
The year-to-date performance for each client company is shown below:
The average year-t0-date return of the 17 companies is 1.41% and the median return is 0.22%. This is much worse than the 9.69% year-to-date return generated by VT. In addition, 8 of the 17 companies have generated negative returns on the year with an average negative return of -15.96%.
Next, we looked back over the last one year:
The average one year return of the 17 companies is 13.73% but the median is -3.37%. There have been three super performers which really bump up the overall average. Even so, the average one year return of 13.73% is still worse than the 18.62% return generated by the broader market over the same time. In addition, more than half of the companies have posted negative returns over the last year.
Aside from a lucky few, our average client has been best off selling their company stock and using the proceeds to reinvest in the broader market. And it isn’t just our clients either… research shows that the average stock doesn’t even out perform treasury bills over time:
So should I turn down stock?
If your company offers you stock we’re not saying not to take it. Rather, our message is that you should sell said stock as soon as you’re able to. Many clients receive restricted stock units (RSUs) as a part of a yearly bonus package. We encourage those clients to sell those RSUs as soon as they are legally allowed to. In addition, some companies offer employees the ability to purchase company stock at a 15% discount to the market price throughout the year. In most cases, we think employees should take advantage of such offerings… but again, you should then sell the stock as soon as you can to net the short-term 15% gain.
Stock compensation can be a great tool in wealth building and help with cash flow management. But only if you execute around that compensation correctly. Yes, there will always be the few companies that vastly out perform the broader market. But, if we take a random sample of the majority, most company stocks will under perform an investment in the broader market. Complicating matters is its very hard to predict if you are going to be one of the lucky ones or in the majority. So we recommend playing the odds: sell your company stock and let your normal earnings be the only thing your company can really dictate.
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