How behavioral investing can help you make the most of your equity compensation

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Any athlete knows that getting in shape takes discipline and diligence. But many athletes have trainers, or even teams of coaches, while the rest of us are left to fend for ourselves.

When it comes to your finances, while you may be able to keep financially fit on your own, imagine how much better off you could be if you had a professional support system. Just as a good trainer can boost an athlete’s performance, evidence shows that a human advisor can help investors improve their financial behaviors and investing outcomes.

Investors are sometimes their own worst enemies. Understanding behavioral investing, which focuses on the intersection of psychology and investing, can help investors manage the risks of making emotional decisions. Collaborating with a professional can be a great place to start—and it’s important to make sure your equity compensation is part of that discussion. A stock plan expert like your Executive Services Relationship Manager can help you zero in on habits and strategies that can help you up your game.

Behavioral investing: Avoiding the pitfalls

The pandemic proved how quickly an unpredictable world can undermine our sense of security, and our rapidly evolving environment continues to highlight the link between emotions and investment decisions. In a 2020 survey, almost half of E*TRADE from Morgan Stanley stock plan participants surveyed said they monitored their benefits much more than usual. More also held onto their shares as a long-term investment and looked for tools and resources to help them find undervalued securities or make decisions for retirement, investing, and trading.1

But how are they making those financial decisions?

We often talk about volatility in the markets, but investors may not realize that along with taking on investment risk, they’re often embarking on an emotional rollercoaster of optimism, fear, and regret as markets rise and fall. Those psychological pressures—and our unconscious biases—can make us susceptible to common behavior traps that can have a negative impact on investing outcomes.

According to Morgan Stanley, common behavioral investing missteps investors make include:2

  • Recency bias—expecting that things that happened recently will continue in their current direction (like recent news events, experiences, or market moves) even when there may be no fact-based data to support that idea.
  • Herding—following the crowd into the same sectors or markets that others are gravitating toward.
  • Anchoring bias—being slow to react to changing information because of how we feel or think about an investment’s perceived value.

While it’s difficult to recognize such blind spots, not doing so can be costly. According to Barclays, giving in to emotion through behaviors like these can potentially reduce investment returns by 2–3% a year—or 21% over a 20-year period—compared to a diversified buy-and-hold strategy.3

The good news is that working with financial professionals can help investors avoid some of these traps, and even potentially boost investment returns.3 That boost partly comes from having a neutral third party provide disciplined, emotionally detached investment guidance.

Morgan Stanley’s Investor Pulse Poll found that 73% of investors see potential value in a Financial Advisor’s help.4 Financial advice can help you avoid mistakes like buying high and selling low, overpaying for stocks, or missing out on buying opportunities. Advisors can also help you make goal-based investment decisions, analyze and adjust different scenarios for different goals, show how different asset classes or goals interact with each other, and assess risk.

A human advisor can be an important check and balance on your investing behavior, and this principle extends to your equity compensation.

Building better habits with equity compensation

Building a successful equity comp strategy is less about finding the right financial product and more about taking a step back to set goals, connect to your complete financial picture, and stick with your plan when markets are volatile or emotions run high.

Investors looking to sell their company equity when they need cash may fall into behavioral traps stemming from life events and liquidity needs. Common pitfalls include forming an emotional attachment to company equity and so becoming vulnerable to single stock risk, becoming fixated on a certain selling price, bad timing, or thinking of equity compensation as a financial “bucket” that exists outside your overall financial plan.

If you’re looking for practical steps to help you develop better habits and protect against common behavioral traps, consider:

  • Updating your current financial plan to incorporate your equity compensation, including contingency plans in the event of market volatility.
  • Building your general knowledge of the investment space to provide a stronger foundation and sense of context for your own decision-making.
  • Exploring automated tools to help remove emotion from your investing decisions.
  • Working with a financial professional who can help you weave your company stock into the big picture.

Executive Services professionals can help you find the most effective strategy for managing your equity compensation as well as your overall wealth, show you how market fluctuations will impact your portfolio and long-term plan, and serve as an objective sounding board. And now, as a part of Morgan Stanley, we can offer you access to a wider range of wealth management solutions. This includes access to qualified financial advisors to help you put the value of your equity awards to work.

The value of advice

None of us can be at our best alone, which is why professional financial advice can deliver added value. Your Executive Services Relationship Manager has the equity compensation expertise to provide tailored guidance and education to help you overcome unconscious investing biases, sidestep emotional pitfalls, and make the most out of your awards. Whether you maintain part or all of your wealth at E*TRADE, expanding your support team for your stock plan decisions can be a key step in maximizing the value of your equity.

  1. The data referenced is derived from E*TRADE Securities LLC proprietary Annual Stock Plan Participant Survey conducted in September 2020 to current stock plan participants of E*TRADE Corporate Services’ corporate clients.
  2. Morgan Stanley, “Rational Investing in an Age of Uncertainty,” Aug. 13, 2020
  3. Barclays Research, “Behavioural Finance Matters.” (n.d.)
  4. Source: Morgan Stanley Investor Pulse Poll of 1,013 U.S. high net worth investors age 25 to 75, with $100,000 or more in investable household financial assets.

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Company leaders who receive a large portion of their compensation in equity know that, over time, these awards can become an invaluable resource—opening the door to a wide range of personal wealth-management and financial-planning choices.

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