Investing in company equity? Four considerations for diversifying your portfolio
Morgan Stanley at Work06/30/21
Summary: Morgan Stanley at Work explores how equity compensation and diversification can play an important role in your overall financial plan.
As part of an overall pay and benefits package, equity compensation can deliver a key benefit: the ability to acquire company shares at a discount or no cost. There are four common types of equity compensation: stock options, restricted stock units (RSUs), performance stock grants, and employee stock purchase plans (ESPPs).
As you accumulate company stock, you may find that it represents a sizeable portion of your total portfolio and net worth. But investments can fluctuate in value based on market conditions, company performance, geopolitical factors, and more. If you have too much of your portfolio invested in a single stock and that stock loses significant value, your net worth can take a major hit.
So if you hold company equity, it’s a good idea to assess your holdings in light of your risk tolerance and financial goals. You may decide to take action to diversify your assets and protect your wealth.
Four essential questions as you consider diversifying your holdings:
1. What is the value of my equity awards?
In considering whether you may need to adjust your portfolio, the first step is to look at the value of your equity compensation. Here’s how:
- Go to the Stock Plan Tab then click on Holdings in the drop down menu.
- From the default view, View by Type, you will be able to see all of your equity separated by types and view the current account values as well as the potential benefit values.
- Sellable shares and exercisable holdings make up the current account values while unvested holdings will be represented in the potential benefit values.
- Informational icons are available to see how values are being represented and calculated.
Remember, whatever type of equity you have, there could be tax implications at conversion (RSUs), exercise (stock options), or at sale (all types of holdings). Be sure to understand the potential tax impacts at different stages of your equity’s life. While the taxes, commissions, and fees on your equity holdings don’t impact the value of your shares, they will affect the amount of net proceeds you have access to.
2. What is the value of my overall holdings?
Once you’ve estimated the value of your equity compensation, the next step is to determine the value of your total financial holdings, or net worth. This can include assets in investment portfolios, trusts, savings and checking accounts, retirement savings accounts, and real estate, to name a few.
Once you know the approximate value of your overall holdings, determine what portion is comprised of company stock. Don’t forget to include any shares that may be in your 401(k) or other investment accounts, as they all count toward the total amount of company stock you hold.
For example, let’s say Denise currently holds $100,000 in vested and unvested shares of her company’s stock, plus $10,000 worth of company stock in her 401(k), for a total of $110,000. When she calculates her total financial holdings, she values them at $500,000. That means that on a gross basis, 22% of her portfolio is held in company stock.
3. Do I need to consider diversifying my assets to help protect myself against risk?
Once you complete your calculations, you’ll want to assess whether your concentration in company stock is in line with your personal goals and risk tolerance.
A common misconception is that holding a few different company stocks means your portfolio is diversified. Diversification involves not only different companies, but different asset classes, market caps, and even different economies.
If the total amount of company stock you hold represents more than 25% of your net worth, you may be considered “over-concentrated” according to some financial professionals1 and may want to consider diversifying your portfolio. This number could be higher or lower depending on your financial strategy and unique circumstances, so check with your financial advisor for their point of view.
4. How can I diversify?
One simple way to reduce the percentage of your equity holdings is to sell some of your shares, making company stock a smaller percentage of your overall holdings. But remember, if you sell stock, you may owe capital gains taxes or transaction fees. Be sure to consult a tax professional to understand the impact of a sale.
Another strategy is to expand your financial portfolio to decrease the percentage that makes up company equity. In volatile markets, some assets may underperform while others perform well, so investing in a range of companies and asset classes may help reduce risk. Investment solutions like exchange-traded funds (ETFs) or mutual funds can help provide diversification because they invest in multiple companies at once. You might also consider investing in causes meaningful to you if they fit with your financial goals.
Don’t forget to make sure your retirement portfolio is diversified, too. As we saw in the hypothetical example of Denise, your 401(k) may also be partially invested in company stock, which could lead to potential over-concentration when valued alongside equity compensation or outside holdings. If you need help developing an asset allocation strategy, talk to your retirement plan provider or E*TRADE Executive Services Relationship Manager.
Start now—but take your time
It’s natural to feel a little overwhelmed about creating a balanced financial portfolio. Take it step by step and remember that there are professionals like your Executive Services Relationship Manager available to help along the way.
Remember that your equity compensation provides an exciting opportunity to help build your wealth, but it must be considered in light of your overall financial picture. As your portfolio grows, revisit it regularly to determine how much of your net worth is invested in your company and whether you should consider making changes to help ensure your portfolio is properly diversified.
Executive Services can help you find the most effective strategy for managing your unique equity compensation needs as well as your overall wealth. And now, as a part of Morgan Stanley, we can offer you access to qualified financial advisors, customized insights, and guidance to help you put the full value of your equity awards to work.
1. Michael Beriss, “Top 10 Financial Planning Rules That Everyone With Stock Options Needs To Know,” myStockOptions.com, October 2020. This number could be higher or lower depending on your financial strategy, so check with your Financial Advisor for their point of view.
The source of this Morgan Stanley article, Holding Shares of Your Company’s Equity? Four Considerations for Diversifying Your Portfolio, was originally published in April 2020.