Financial Advisors in Portland, OR

How Much Company Stock Should I Hold? (Part 2 of 2)

How Much Company Stock Should I Hold? (Part 2 of 2)

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This post is part two of ‘How Much Company Stock Should I Hold?’ In this article, we dive deeper into two areas:

  1. If you hold company stock, what form of equity compensation is the best to own, and
  2. How to maintain your desired allocation over time

What Type of Company Stock Should I Hold?

Let’s assume that you wish to maintain a position in your company stock—either because you want to participate in the upside or your employment agreement requires you to do so.

Most technology professionals have various types of equity compensation, and the ability to buy shares in numerous accounts, which means it’s crucial to decide on the kind of stock to hold.

So, what form of company stock is the best to hold?

Stocks Options

Stock options are the first place you should look. They often vest over a period of time (meaning you couldn’t sell them now anyway), provide leverage or require less capital to participate in the upside of your company, and, in the case of ISOs (Incentive Stock Options), potentially provide favorable tax treatment.

Because the leverage point isn’t always intuitive, let’s provide an example of holding 1,000 shares in stock options vs. 300 shares of RSUs (often options are granted at 3-4x the rate of shares of RSUs).

  RSUs Options
Shares 300 1,000
Grant/Strike Price  $7.50 $7.50
Value @ $20 per share $6,000 $12,500
Value @ $5 per share $1,500 $0

As you can see, the options allow you to participate in the upside to a great degree, but if the stock falls below the strike price, the option grants expire worthless.

The leverage works both ways.

ESPP Shares

ESPP shares are another great way to participate in the growth of your company—with a floor on the downside (via the discount and lookback periods). Additionally, if held for two years from the grant date, they potentially have favorable tax treatment. If trying to build up a stake in your company, this might be the next place to hold shares. However, we typically recommend taking the free money (via the discount) and quick-selling your shares. (See ‘Your Biggest Advantage in Employee Stock Purchase Plans’ for more.)

RSUs

RSUs typically have a vesting schedule, but the tax treatment of RSUs is no different from if you were to receive a cash bonus (on the vesting date) and then use that cash to buy your company’s stock.

Because there is no inherent advantage of these shares (once they vest, they are like any other shares), they are next in line of what to hold.

Taxable Accounts

Unless you have shares with a low taxable basis and wish to hold them for potential charitable giving for other tax planning strategies, it typically doesn’t make sense to buy/hold your company stock in a taxable brokerage account.

Unless you are significantly underweight your desired holding in your company’s stock, use your Option, ESPP, and RSUs plans first.

401(k)

More so in the past, but occasionally today, employees will buy company stock in their 401(k). With no tax barriers to selling in this account and typically good options to diversify, this is the last place we recommend holding company stock.

Here is a quick summary of the key features of the various options

  Taxes Vesting Requirements Leverage
Options Income (or capital gains for ISO’s) Yes Yes
RSUs Income, then capital gains Yes No
ESPP Income, then capital gains No No
Taxable Account Capital gains No No
401(k) n/a No No

How should I maintain my target allocation over time?

Once we’ve determined which types of equity compensation to hold, our next question is how to maintain a target allocation over time.

Here are three things to consider:

  1. Stop the bleeding – If you want to reduce your allocation, the first thing to do is stop buying in your 401(k), taxable brokerage accounts, or any other account without a built-in advantage to the equity. *Also, stop purchasing other stocks of other companies in the same industry as that doesn’t help much in terms of diversification.
  2. Sell what you need – The next step is to sell shares to get to your desired allocation. Put in place a plan to sell that considers taxes and the preferred accounts outlined above.
  3. Maintain – Once you’ve reached your desired allocation, develop a plan to monitor your allocation, stay diversified over time, and rebalance when needed. Maybe that’s as simple as a calendar reminder! But you should consider your company’s share price. If your company’s share price skyrockets (Yay!), your allocation will increase with the share price—making it a good time to rebalance.

As always, if we can be of any help or if you would like to discuss your company stock or equity compensation strategy, you can get in touch here.

 

 

What’s Your Benchmark?

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How did the market do today?

Whether it’s NPR, the Wall Street Journal or small talk with your neighbor, most conversations about the stock market and economy inevitably reference either the Dow, NASDAQ or S&P 500. But are they appropriate measurements? What do they actually track? And most importantly, are they appropriate measure of performance?

The investment benchmark industry is big business. Though there are thousands of benchmarks or indices, this post will focus on the big 3: Dow Jones Industrial Average (the Dow), NASDAQ and S&P 500.

This 2-part blog will:

  1. Provide an overview of popular benchmarks
  2. Provide takeaways when assessing performance

US Stock Market Benchmarks: Tale of the Tape

Key Differences

Objective

All three benchmarks vary in their objective. The Dow’s goal is to provide a broad gauge on how the US stock market is doing. While it has constituents in every sector of the market excluding utilities and transportation, only tracking 30 companies limits its ability to provide an accurate measure of the market as a whole considering there are more than 3,500 publicly traded companies in the US stock market.

The S&P 500’s goal is to provide a measure of the US companies in the “large-cap” space. Of the US stock market, large-cap companies make up roughly 80% of all companies.  A companies’ cap-weighting is calculated by multiplying the outstanding shares times the stock price.

For context, let’s compare two companies at the opposite end of the spectrum. Apple has a market-cap of roughly $1.9 trillion and Ralph Lauren’s market-cap is $5 billion. To be included in the index, companies must maintain a market-cap weight of $4.1 billion. The S&P 500 is a great barometer for its target space of large US companies, but all too often is incorrectly used to quote “the market.”

The NASDAQ benchmark doesn’t have a formal objective like the other two and is only intended to measure the performance of all companies listed on the NASDAQ stock exchange. While is spans many industries, it has a much larger concentration in technology companies making it the de facto benchmark when discussing the performance of technology stocks.

Index Weighting: Market-Cap vs Price

How an index is calculated plays in an important role in determining the performance of the index. The S&P 500 and NASDAQ are cap-weighted indices and the Dow is price-weighted. What’s the difference?

For a price-weighted index, the share price of the stocks determines the weighting within the index. Therefore, the higher the share price of a stock relative to the other stocks, the greater impact on the performance of the index it will have. Although a company’s stock price is an input into calculating its market-cap, it only tells half the story and often overweighs the performance of a company with a lesser economic footprint.

A cap-weighted index avoids this drawback by deriving its performance from the movement of the underlying holdings multiplied by their respective allocations as determined by market cap.  For context, using the companies listed earlier, Ralph Lauren makes up roughly 0.1% of the S&P 500, while Apple makes up almost 7%. This method is more common among benchmarks tracked by index funds.

Reconstitution

In the investment management world, reconstitution refers to the process of an index reshuffling the list of companies they’re going to track. It typically involves removing companies that no longer fit the bill and replacing them with those that do.

The Dow doesn’t have a formal method outlined by quantitative measures and can reconstitute at any time. Typically, changes are made in response to corporate actions or market developments.

The NASDAQ simply tracks the companies on the exchange, removing any judgement or analysis.

The S&P 500 has a much more systematic approach and is the most closely tracked of the three. Due to the increased popularity of passive investing, there are hundreds of index mutual funds or ETFs that track the S&P 500. Because of this, the quarterly reconstitution causes increased trading of those securities involved which can lead to some drawbacks for index investors (more on that in the next post).

Conclusion

All three benchmarks are used interchangeably but have distinct differences. The next post will offer a different perspective and provide a more robust method for assessing the stock market and performance of your investments.

 

How Much Company Stock Should I Hold? (Part 1 of 2)

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Chances are if you work in the technology industry, part of your compensation will include company stock. We’ve written about various forms of equity compensation before (RSU’s here and here, ESPPs here and here, Stock Options here) but today we want to address a question that anyone investing in their company ultimately has to answer: How much company stock should I own?

While there’s no one-size-fits-all answer to this question, there are three factors you should consider.

Let’s jump in!

What Are My Chances of Beating the Market?

Before answering the specific question of how much company stock you should hold, it’s important to understand the odds. In other words, should you expect to have an advantage investing in your company’s stock?

Unfortunately, setting aside any vesting requirements or favorable tax treatment, the answer is no.

Hendrik Bessembinder in his 2017 paper ‘Do Stocks Outperform Treasury Bills?’ finds that “Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries.”

The base rates for investing in any individual security is a lower expected return with more risk! Not a bet you should be tempted to make.

Why is this? The risk part is intuitive. The more we diversify, the more we spread our bets and aren’t tied to the prospects of one individual company.

The return part is less intuitive. Why would we expect a lower return for any randomly selected stock?

To understand this, we have to consider the concept of positive skewness. With any stock your maximum loss is capped at 100% while your upside is technically unlimited. Because of this, the odds are that any randomly selected stock should be expected to have a return less than the market. The stocks that perform really well pull up the average while most stocks (nearly two-thirds according to research by Longboard Asset Management) underperform the index.

They find over the period from 1983-2006:

  • Nearly 2 in 5 stocks actually lost money (39%)
  • Nearly 1 in 5 lost at least 75% of their value (18.5%)
  • Nearly two-thirds of stocks (64%) underperformed a broad index of US Stocks (The Russell 3000 Index which represents around 98% of the investable U.S. equity market)
  • Only 25% of the stocks were responsible for all market gains

What About Risk Tolerance?

Once we’ve calibrated expectations, we need to consider risk tolerance. Here, there are two factors to consider:

  1. Our willingness to take risk
  2. Our ability to take risk

Think of willingness as the ‘sleep-at-night’ factor. How comfortable are you in your gut with the up and down roller coaster ride of holding a meaningful amount of money in your company’s stock?

Ability is more quantifiable. The ability to take risk depends on your cash flow needs, age (or proximately to retirement), time horizon, and the positioning of your assets. These questions can all be answered with the help of a financial plan (see this and this).

A Rule of Thumb or Starting Point

If you do any “googling” on this topic you will quickly find that most professionals recommend a maximum of 10-15% as a rule of thumb for how much your company stock should makeup your total investments.

This is a helpful starting place but the right answer for you will vary based on the factors above.

That said, another way to look at is not in terms of percentage but in terms of the downside.

How much stock could you hold so that if it declined significantly you wouldn’t need to change your financial plans. And are you comfortable risking this amount?

If yes, maybe this level of risk, while not optimized financially, is the right decision for you given a desire to benefit from the upside of your company’s success. However, on the other hand if you’re thinking about retirement and desire to maximize the odds of doing that as planned without extending your time horizon, taking some risk off the table is the smart bet.

In an upcoming blog we will dive deeper into this topic by addressing the best types of equity compensation to hold (if you chose to do so) and a process to maintain your desired target over time.

We Can Help

Lastly, if you’d like some help managing your company stock and planning for the key financial variables that will impact your success, get in touch. We’d be happy to talk about your individual situation in detail.

 

 

Rebalancing: Simple, Effective But Not Always Easy

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In Our Bear Market Playbook, we included rebalancing as part of the game plan when markets drop. Often overlooked as obvious and boring, it’s effective and, therefore, not to be neglected.

Most of the time, rebalancing is a risk management strategy as stocks get sold to fund other portfolio diversifiers. But during a market downturn, like Q1 2020, there is a return enhancement or a rebalancing bonus that shows up.

In this post, I want to quantify this rebalancing bonus and make two additional points. First, that’s it’s okay to rebalance “early.” Don’t expect to call the bottom. And second, that disciplined rebalancing is uncomfortable. You’re not going to feel like buying stocks on the way down, nor will you feel like selling them on the way up—Buy low. Sell high.

To set the stage, let’s walk through an example of a portfolio that was systematically rebalanced over the last 13+ years—a period that covers both the 2008/2009 financial crises and now the Coronavirus lock-down. This simple portfolio consists of 60% stocks and 40% bonds and gets rebalanced when the allocation to stocks deviated by more than 10% from its initial target (i.e., greater than 66% or less than 54% in stocks).

In the chart below, we can see how the rebalanced portfolio (green line) compared to a portfolio that was not rebalanced (grey line). The vertical bars represent the rebalance dates, with the green bars indicating a rebalance that calls for buying stocks to bring the allocation up to the 60% target. The red bars indicate the opposite—stocks get sold to bring the allocation down to the 60% target.

Notice the rebalance into stocks coming in late-2008 and early 2009 (when the market was dropping) and again in March of 2020.  Stocks get sold on the way up—in 2009, 2013 and 2017.

The benefits of this disciplined rebalancing approach can be seen more clearly in the next chart, which plots the difference in performance between the two methods. Over this period, rebalancing the portfolio added nearly $100,000 of wealth to a $1 million-dollar portfolio, or a benefit of 0.4% annualized per year. The portfolio that wasn’t rebalanced ended up being worth nearly $1.7m vs. $1.8m for the rebalanced portfolio.

What’s interesting is that the 0.4% annualized benefit over this period comes close to prior estimates done by others on the benefits of disciplined rebalancing. In their Advisor Alpha whitepaper, Vanguard estimates the benefit of rebalancing to be 0.35% annually. Investor and author Bill Bernstein, in his “The Rebalancing Bonus” paper, calculated the benefit from rebalancing a 50/50 portfolio over the long-term period of 1926-1994 to be 0.49% annually.

Rebalance Timing

This year, we rebalanced most clients’ portfolios between March 13th and 23rd (timing depending on risk tolerance, cash flows, and other client-specific factors), which turned out to be decent timing but certainly wasn’t known in advance.

In fact, as can be seen in the first chart above, with a rebalancing approach based on tolerance bands, usually, you will be “early” to rebalancing. Meaning that during a bear market, you will probably get your alert to rebalance before the market bottoms. Using our scenario above, the portfolio was rebalanced in September 2008, again in October (with the markets dropping 27% over this period) and again in February of 2009.

With a crystal ball, you ideally would have waited to rebalance until the market bottomed in March of 2009. The obvious problem with this strategy is that it’s impossible to know when the bottom is in. The cost of being early in 2008 was, at one point, $50,000 versus not rebalancing.  But this difference was recovered by June 2009, which resulted in a nearly $100,000 benefit over the entire period.

Simple, Not Easy

As I mentioned above, rebalancing requires acting counter to the direction the market is moving, which makes pulling the trigger uncomfortable. Early in a bear market, it’s not going to feel like rebalancing is the right decision. Waiting for a better time will be preferred. And once things do recover, it will be tempting to “let it ride” and not rebalance back into bonds.

Consider the rebalance dates from our example above and the following headlines pulled from the Wall Street Journal on the respective rebalance days[1]. Buying stocks typically requires acting when the news is negative—acting counter to the prevailing news of the day.

I’ll be honest, rebalancing over the period of March 13th to 23rd didn’t feel like the right time to do it. But we have a process in place and a team that holds each other accountable to the process in order to get it done.

Like so many things that “work” in investing, rebalancing is a simple concept that’s not always easy to carry out in the real world as the big benefits tend to show up in moments of market stress when taking action feels uncomfortable.

As always, if we can be of any help or if you would like to discuss your rebalancing strategy, you can get in touch here.

 

*Endnote: Stocks are represented by the ETF ACWI from 03/28/2008 onwards (the funds inception date) and by SPY from 12/31/2006-03/27/2008. Bonds are represented by the ETF AGG for the entire period (12/31/2006-04/14/2020). For the ‘No Rebalance 60/40′, the investor is assumed to start with $600,000 in stocks and $400,000 in bonds. The investor simply holds the positions and accepts the changes to the portfolio allocation mandated by buy and hold returns. The ‘Rebalanced 60/40’ investor is assumed to start with the same $600,000 in stocks and $400,000 in bonds. However, when this investor’s stock allocation drifts below 54% or above 66%, the portfolio is rebalanced back to target.

[1] Or as close as available via the Internet Archive.

Enhancing the Investor Experience – Perspective on the Recent Volatility

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Dimensional Fund Advisors (DFA), an asset manager we utilize in our client portfolios, produced a webinar for clients that focused on putting the recent market volatility in perspective. While DFA’s performance track record speaks for itself, what sets them apart in the industry is their ability to assimilate complex historical data into intuitive themes that allow investors to achieve superior returns while having a better investor experience along the way. If you have time, I encourage you to watch the video here. If not, below are three key takeaways from the webinar.

1. The Emotional Roller Coaster

Since its peak on February 19th, the stock market (S&P 500) has dropped as much as 34%. Market drops are never fun but dealing with a global pandemic and the somber reality of COVID-19 adds another element. And while the Coronavirus pandemic is the primary catalyst for the anxiety in the financial markets, other current events are impacting prices on a daily basis as well – trade wars, oil shocks and election headlines, to name a few. As market participants process this new information, we’re seeing big swings, or volatility, in the stock market on a daily basis, leading to what feels like an emotional roller coaster.

While this analogy isn’t new, it’s never been more relevant. For each trading day during the week of March 16th, the market didn’t have consecutive days in the same direction.

There are a lot of unknowns right now, but here’s what we do know:

  • After big drops, markets tend to experience higher volatility
  • Timing the market is never recommended, but heightened volatility makes this even more difficult to execute
  • Like a roller coaster, thrill seekers expect to experience adrenaline pumping highs and lows, yet the only way they can get hurt is getting out of their seat before the ride is over. In other words, hold tight!

2. “This time is different”

“Yeah, markets generally recover after these types of things, but this time is different.” This is a common reaction when markets fall in response to bad news. And it’s correct. Things are different this time. The NCAA tournament has never been canceled, the education system has never been shut down on such a large scale and American culture has never been brought to a screeching halt like this before.

Of course, things were different after 9/11, the 2008 financial crisis and the 2016 election. The point is that, yes, things are different this time, but things are different all the time. There is a main constant through all these events – a very important fundamental investing principle: markets work. The rapid decline and subsequent swings are a great example of the stock market incorporating new information into prices.

Think about this – if the stock market didn’t react to the recent events, would you feel better? Investors take on an unknown risk that comes with owning stocks and for that, they expect a positive return. As history has shown, our world is dynamic and ever changing but the one constant has been the ability of the market to reward those that can maintain their strategy in face of uncertainty.

3. Put your bonds in a drawer

With the 24/7 news cycle today, it’s difficult to mentally separate the recent news from a long-term investing strategy. It’s human nature to extrapolate the impact of current events into the future. In light of this, the question is: how does one maintain a long-term perspective in the face of a major market event?  While it’s not easy, people have done this for years with their bond investments. We’ve written about this before but let’s revisit this concept.

Back in the old days when an investor would purchase a bond, they would receive a certificate as proof of purchase. In order to receive the regular coupon payment, they were required to clip a coupon from the certificate and mail it in to receive the payment. All the while, the price of the purchased bond was fluctuating with the natural ebbs and flows of the market, but the investor never pulled the bond out of the drawer to reassess the investment. Their only concern was getting their money back at the date of maturity.

While different in many ways from bonds, stock investors stand to benefit if they can mentally put their stocks in a drawer. By ignoring the short-term swings in the market and maintaining a long-term perspective, the odds are they’ll have a better investing experience.

In conclusion, since the publication of DFA’s webcast, markets have continued to experience volatility and will most likely continue to do so. Don’t take this as a sign of worry but a signal that markets work. By having a better perspective on why markets behave the way they do and thinking about things in a different light, you can increase the odds of, not only increasing your returns but, enhancing your investing experience.

To quote Tom Hanks’ character in the hit baseball movie, A League of Their Own, “It’s supposed to be hard. If it wasn’t hard, everyone would do it. The hard is what makes it great.”

Our Bear Market Playbook

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This post isn’t meant to minimize the human impact that the Coronavirus has on those affected but simply to share perspective on the impact of the outbreak to the markets and a well-diversified investment portfolio.

With the coronavirus pandemic now impacting the entire globe, markets across the world are reacting. As of Tuesday’s close, the S&P 500 index is off 26% from its all-time high less than a month ago. What’s surprising is not the size of the drop (we’re not to an average bear market drop yet), but the speed in which the selloff occurred. 

While all bear markets seem to come out of nowhere—this one literally came out of thin air. 

In this post, I’m going to cover our four-part “bear-market playbook,” which outlines how we operate on behalf of clients during these periods. And if you are not a client, this will give you some actions to consider taking now.  

At a high level, the playbook is: 

  1. Design Your Plan 

  2. Stick to the Plan 

  3. Take Appropriate Action 

  4. Eliminate the Noise – Only Pay Attention to Key Factors 

Simple. Not easy. 

Before we dive into each of these steps, a couple of comments first. 

During these periods, especially given the heightened health concerns of this particular bear market, it’s okay to be nervous or scared. That doesn’t make you a lousy investor; it makes you human. Most people own stocks because of the evidence of higher returns compared to bonds or other investments. But, during bear markets, the desire to do something, to cave to the fight or flight instinct, is only human. Unfortunately, bear markets are the price of admission to investing in stocks. 

Many people are panicking  because they don’t have a plan. But know that, if you are a client of Cordant, you have a financial plan in place.  

Let’s take a look. 

Step 1: Design Your Plan 

As the old adage goes, “The best time to plant a tree was 20 years ago. The second-best time is now.” The same thing applies to a financial plan. So, if you don’t have one in place, don’t beat yourself up. But do take action. 

For our clients, a plan means three things: a financial blueprint, a financial plan, and an investment portfolio that’s linked to that plan. 

The financial blueprint is an important guiding document as to what goals and objectives matter and provides a great reference point in times of market stress.  

The financial plan includes modeling and stress-testing for bear markets and recessions. In fact, in our post How to Stress Test Your Financial Plan, we looked at the worst-case historical time to retire (1929) and stress-tested a plan based on it (check out that post for all the details). 

And a well-designed portfolio not only matches the risk assumed in the plan to your actual portfolio but also includes an allocation to cash and bonds that, while a drag on performance in the good times, provides a much-needed buffer and access to liquidity in these types of market environments. 

Again, if you are a client of Cordant, know that you have a financial plan in place, and it is stress-tested against bear markets and recessions. 

Step 2: Stick to Your Plan 

As the philosopher/boxer Mike Tyson once said, “everyone has a plan until they get punched in the face.” This second step is important but perhaps the hardest part.  

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health. But the real threat is in selling at the bottom and then missing out on the recovery.  

What makes sticking to your plan so hard is that, in every bear market, things feel unprecedented. Our focus narrows to what feels like three feet in front of our face. It becomes challenging to plan for three days down the road, let alone three years. 

However, if we examine past bear markets and look at how investors have reacted in the past, hopefully, it can help us pull out of a purely short-term lens. 

Prior Bear Markets 

While every bear market feels different in the moment, we’ve been through drops like this before. Analysts at Goldman Sachs recently looked at past bear markets and divided them into three types: Structural, Cyclical, and Event-Driven. Structural bears include periods like the 2008 financial crises while the “Event-Driven” category includes “exogenous shocks” like war, oil price shocks, or now, a global pandemic.  

The “good news” is that historically these “event-driven” shocks tended to be the shallowest, with average drops around 30%, and typically regained their previous levels within 15 months.  

What’s more, for a portfolio holding both stocks and bonds, the time to get back to previous levels is even quicker. Looking back at the 2008 financial crises shows that while the S&P 500 took three years to recover, a 60% stock/40% bond portfolio recovered in roughly half the time. 

 Source: J.P. Morgan’s Guide to the Markets. Q1 2020 

You are not alone 

That last piece of perspective that might help is knowing that you are not alone. In these bear markets, it can feel like everyone is selling and that only a fool would ride it out. While it may seem that way, it’s not the reality.   

As the late Jack Bogle, the founder of Vanguard, once stated: 

“My rule — and it’s good only about 99% of the time, so I have to be careful here — when these crises come along, the best rule you can possibly follow is not “Don’t stand there, do something,” but “Don’t do something, stand there!” 

There will always be those who start coming out of the woodwork saying they predicted this (no one did). And saying things like ‘stocks are risky’ (they always are), asking if you’re getting out, and that everyone is panicking (everyone isn’t). 

To that last point, Eric Balchunas at Bloomberg pointed out that during the market selloff of over 7% on Monday the 9th, money poured into the most popular Vanguard equity ETF’s to the tune of $1.2 billion and over $6 billion in the five days up to  March 17th. 

Clearly, not everyone is selling. 

Despite this, the natural question remains: should I get out now and avoid more of the same? 

It has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish.  The best approach has, in the past, been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month, or next year. 

During the global financial crises, Vanguard conducted a study of individual investors. From 2008-2012 they found that the investors who faired the best were the ones who didn’t touch their portfolio and that these investors outperformed those who did by 1% annually. 

While the talking heads encourage action, the best response is sticking with your strategy. 

Step 3: Take Appropriate Action 

While it’s best to stick to your strategy, even a bear market creates opportunities on which to capitalize within that strategy. Our playbook here is: 

Since we have written about most of these strategies before, I won’t elaborate here except to say that this is our checklist of actions  to make the most of a down market. 

Step 4: Eliminate Noise – Pay Attention to Key Factors 

It’s important to remember that financial media exists for one purpose—ratings. It’s not there to break actionable news, give you profitable trading advice, or make you smarter. They simply want as many eyeballs as possible. 

But Joshua Brown writes, “This week, there will be 1.9 million coronavirus tests shipped out to hospitals, government agencies and public health professionals all over America. The one thing we know for sure is that a lot of people will test positive for COVID-19.” 

In short, the news about the outbreak is probably going to get worse before it gets better. But as investor Jeremy Grantham once said, “[B]e aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.” 

So, instead of following the news minute by minute, if you’re an information junky (like I am), watch these six things and then, as hard as it is, take a break. 

  1. Health Updates from National and Local Authorities. Since this is both a pandemic and market event, make sure to follow updates and guidance from the CDC, WHO, and local authorities. 
  2. The number of new cases in the US and Globally. China and South Korea largely saw the number of new cases decline after two to three weeks of large-scale social distancing. How quickly can the rest of the world slow the spread? Click here for current data.  
  3. Is the US economy in recession? What is the timing and severity of the recession? Most economists are now predicting at least one-quarter of negative GDP growth. With First Trust calling for a 10% drop in Q2 and Goldman Sachs calling for a 5% drop. According to First Trust’s Chief Economist, Brian S. Wesbury, in a note to clients on March 16th, 
    • “We now think the economy will take a huge hit in the second quarter, contracting at an annual rate of around 10% (like in the first quarter of 1958, during the Asian Flu) with growth returning to a 4.5% to 5.0% average rate in the second half of 2020 and all of 2021.”   
    • He continues, “A Coronavirus Recession may sound like a reason to sell, but it’s not.  Stocks typically rise starting 3 – 6 months before a recovery.  We’re already in that window.  Those who sell now are likely to regret it.” 
  4. Has a recession already been priced into markets? According to an analysis by RBC, in the twelve recessions since 1937, the average market drop was 31% (the lowest was 15% in 1953/1954, and the largest decline was 57% in 2008/2009). The good news is we’re already close to the average recessionary drop. 
  5. Will policymakers’ response be sufficient to restore confidence? Actions so far include: 
    • The Federal reserve dropping rates near zero and resuming bond-buying to provide liquidity in the markets 
    • Fiscal Stimulus and testing packages which the Wall Street Journal does a nice job of summarizing below and here. 
  6. How many potential sellers might still be out there? CNN has a good dashboard in their Fear & Greed index. Currently, we’re at the “extreme fear” level. As Warren Buffett says, “be fearful when others are greedy and greedy when others are fearful.” 

If you are a client, know that we are watching these things on your behalf, but if you must, these are the six things to watch and then take a news break.  

In closing, just a quick reminder that, like all bear markets, “this too shall pass.” We are resilient and have survived many economic bumps in the past, and we will again.  In periods of market stress, remember to keep the big picture in mind. No one knows precisely what will happen next, but it’s a fair bet that, like they always have, stocks will go both go up and down. 

To paraphrase the Mandela quote, “courage is not the absence of fear, but moving forward despite that fear.” 

Some Perspective on Recent Market Movements: The Coronavirus and Things to Remember About Investing in Stocks

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This post isn’t meant to minimize the human impact that the Coronavirus has on those affected but simply share perspective on the impact of the outbreak to the markets and a well-diversified investment portfolio.

 

With Coronavirus fears dominating the headlines this week and pushing the markets into correction territory (defined as down 10% or more) it’s worth reviewing some key points on long-term investing—perspective we shared during the market drop in 2015 and again after the Brexit vote.

The headlines are different, but our advice remains largely the same.

While the financial markets don’t like uncertainty, and traders are likely going to sell first and ask questions later, it’s important to remember that we are investors, not traders.

Our time frame as investors (and your goals, objectives, and financial plan) is years and decades, not hours, days or even weeks. The current crisis, or any market movement over a week, shouldn’t derail your investment strategy. Remember, the impact of a correction, recession or bear market is built into a well-designed financial plan.

Market Reactions During Virus Emergencies

According to Jeffrey Kleintop, chief global investment strategist at Charles Schwab, who compiled the data below on the market’s reaction to past outbreaks, the financial impacts tend to be short-lived.

According to an article on CNBC which cites research from Citi found that the market drops, in past outbreaks anyway, to be mild.

As Dan Egan, Director of Behavioral Finance at Betterment said, “The people who actually come out of this the best are the people who think about things in the context of their own plan, not in terms of trying to predict the trends.”

Key Considerations

With the recent market movement in mind, here are five key things to remember about the markets and investing in stocks.

1. Things could get worse. I write this not to alarm anyone (things could also get better), but to set proper expectations. After Thursday’s 4% drop, the U.S. market (SPY) is down 11.2% since its peak on February 20. Non-US Developed markets (ACWX) are down 7.7% and Emerging Markets (EEM) 6.3% over this period.

According to analysis done by Adam Butler at BPG and Associates, since 1962 when the U.S. markets have seen a sell-off of 7% or more, the median final drawdown is 16%.

However, as Jason Zweig has pointed out in a Wall Street Journal article “Stocks could drop another 10% from here, or another 25% or 50%; they could stay flat; or they could go right back up again.”  The point is no one knows, and that bring us to the second thing to remember.

2. You Don’t Just Hold Stocks. A well-diversified portfolio most likely holds a healthy allocation to cash and bonds in addition to stocks. Weeks like the last one are why. For clients, depending on their risk tolerance, we tend to hold anywhere from 20% to 60% in cash and bonds. For even our most aggressive clients (with only 20% in cash and bonds), this means five years of portfolio withdrawals (at the rule-of-thumb 4% withdrawal rate) in less volatile investments.

3. You Can’t Time the Markets. And neither can anyone else. If someone tells you they know what’s going to happen next, they’re likely either lying to you, selling you something, or extremely naïve—maybe all three. Since the bull market that started in March 2009, the U.S. market has experienced pullbacks of greater than 5% on 13 different occasions. The largest of these was the nearly 20% pullback that ended in October 2011. And yet over this period, the market is up 220% — making each of these pullbacks just a blip on the radar over the six-year period. (Preceding figures as of 2015)

What matters is “time in the markets, not timing the markets.”

Again, to quote Mr. Zweig, “After a market drop, or at any other time, no one knows what the market will do next. The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely it is that he will turn out to be wrong.”

4. Weeks like this are a big reason stocks return more than bonds. From 1928-2014, stocks compounded at 9.6% annually versus 5.0% annually for bonds. This 4.6% difference is called the “equity risk premium.” And there are fundamental reasons for this premium: It’s compensation for stocks being lower in the capital structure than bonds and as a reward for being subject to both the downside and the upside of a company as an equity shareholder.

But, the feeling you have right now—that uncomfortable feeling in your gut making you wonder “is my portfolio alright?”—that’s also a big reason that stocks have returned more than bonds over time. In a very visceral way, owning stocks compared to bonds is simply more painful at times. These pullbacks happen and it’s not a whole lot of fun when you’re in the middle of one.

I think what’s important, then, is to step back and see the forest for the trees. These pullbacks (the trees) can seem pretty big and important when we are in the midst of them. But zooming out to the forest-level view, we get a sense of just how minor each individual pullback is to long-term market performance.

The chart below from my friend Michael Batnick at Ritholtz Wealth Management, paints this picture nicely. Notice how much of the time the stock market has spent in either a 5%, 10%, or 20% drawdown. And yet from 1957-2014, for those disciplined investors willing to ride out these drawdowns, the market has returned 10.2% annually—turning $1,000 investment into more than $250,000! What matters for the disciplined investor is again, “time in the markets, not timing the markets.”

Source: S&P 500 Index via Michael Batnick

5. Your Behavior Matters: Don’t pay the panic tax. We just saw that stock market investors spend a good chunk of their time in a drawdown. Therefore, to realize the equity premium risk, we have to avoid buying and selling, based on fear or greed, at the wrong time. We call it the “Panic Tax” and paying this tax can have a huge impact on your returns.

According to Morningstar, for the 10 years ending in 2014, investors in U.S. equity funds lost 1% annually from their returns because of these poorly timed buy and sell decisions (International fund investors fared worse, costing themselves 1.2%). For example, in 2012, the U.S. equity fund category saw the largest net outflows (-$94 billion) and taxable bonds had the highest inflow ($270 billion). Their returns in the next year: 35% for U.S. equity versus 0.15% for bonds.

So, What Should You Do? What Are We Doing?

Most of the time doing nothing, as boring as it sounds, really is the best action. But it can be difficult to “not just do something; sit there” as the saying goes. So, now that we’ve gained a little perspective, taken a deep breath so to speak, you might wonder if there are any actions worth taking.

Glad you asked.

1. Frame current market movements in light of your long-term goals. Chances are nothing that happens this week is going to deter your long-term financial goals or plan. View your investments as a means to achieve your long-term financial goals, and don’t worry about the tick-by-tick movement of your portfolio.

2. Assess Your Portfolio Risk Now. If the recent market movements have you nervous, use this as a reminder to assess the riskiness of your portfolio. Instead of trying to predict when market corrections will happen, it’s better to figure out: Are you comfortable with the way your portfolio is positioned? Are you comfortable with the risk you’re taking? And are you able to stick with your strategy in a down market?

If you’re currently a client, you’ve gone through this portfolio risk assessment already. You know what to expect from your portfolio performance both in terms of returns captured on the upside and the downside. However, if you would like to review it again, as always please give us a call.

But chances are if you’re not working with an advisor, assessing your portfolio risk isn’t something you’ve reviewed recently. Some people, still scared from 2008, are taking too little risk; they’re limiting their returns and therefore the potential to achieve their goals. Others, spoiled and complacent after the great run of the last six years, have too much risk in their portfolio. The risk here is panicking during a market correction, selling out, and missing any market recovery. Either way, taking too much risk or not enough is damaging to your portfolio returns—but, even more importantly, to achieving your financial goals.

So, does your portfolio have a level of risk you are comfortable with? A strategy you can stick with and that gives you confidence in achieving your goals? Now is the time to assess.

3. Look for opportunities. As Warren Buffett said, “Be greedy when others are fearful.” Should the market selloff continue, we will look for buying opportunities—whether that’s increasing exposure to a given region or simply rebalancing to sell appreciated bonds and buying stocks at a discount.

4. Tax-Loss Harvest. Lastly, for investors with taxable assets, now is a good time to review your positions for any losses. If you have any positions at a loss, a tax-loss harvesting strategy is designed to realize any losses in your portfolio today and use these losses to reduce your current taxes.

Again, if you are a client, we are doing this for you. We are reviewing your portfolio for any opportunity to reduce current taxes by tax-loss harvesting. And if you’re not a client, review your portfolio on your own for any tax harvesting opportunities you may have.

 

So, there you have it. In periods of market stress, remember to keep the big picture in mind. No one knows exactly what will happen next, but it’s a fair bet that, like they always have, stocks will go both go up and down. Because of this, it’s important your portfolio is positioned in support of your long-term goals and objectives and is designed with a level of risk you are comfortable taking.

 

 

Should You Reduce Your Investment Risk When You Retire? The Four Factors to Consider

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The common perception is that as you age, or more specifically as you approach retirement, you should reduce the risk in your investment portfolio. In most cases, this means reducing exposure to the stock market and increasing exposure to fixed income (i.e., bonds). The goal is to dampen the ups and downs with the understanding that the potential upside is limited.

The reason this reduction in risk often makes sense is straight forward: As one approaches retirement the time horizon gets shorter, which means the portfolio has less time to recover in the event of a market decline. Further, if one is drawing on their portfolio (which is usually the case in retirement) during a down-market, the returns necessary to get the portfolio back to even are even greater.

A great example of how this risk adjustment can be made overtime can be seen in the popular Target Date funds available in most company 401(k) plans. These mutual funds are actually set up to adjust risk automatically overtime, for a fee of course. Here is a helpful chart showing the changes to Vanguard’s Target date fund allocation over time. As you can see, the stock exposure is reduced as the “Target Date” approaches. Target Date funds are designed to adjust risk as the investor approaches a “Target” retirement year. The reason these types of funds are popular is because for a large percentage of the population it makes sense to reduce risk as they approach and ultimately move into retirement for the reasons mentioned above.

However, reducing risk is not the right solution for everyone. Ultimately, there are four factors that should affect the decision, and “what makes sense for most people” isn’t one of them. So what are the four factors?

1)       Your financial objectives and goals

At Cordant, when we say “financial objectives and goals” we are talking about what our clients want to do with their wealth.

The investment portfolio you have accumulated is a resource (more on this in #2) and before you can determine the right amount of investment risk for that resource, you must identify its purpose so that the two can be aligned. Take, for example, two different employees of a corporation that both have $2MM in their portfolio and plan to retire in 5 years. If one employee has an objective to leave $1MM to her children when she’s 90, but the other just wants confidence she won’t run out of money before she dies, the acceptable risk for that resource is likely to differ greatly, all else being equal.

Your financial objectives and goals are the purpose for the resource you’ve accumulated. Before you make any adjustments to how that resource is invested, answer the question: What do I need this for?

2)     The resources you have in place to support your objectives

Once you have identified your objectives, the next step in determining appropriate risk is to identify the resources you have in place to achieve them.

Your investment portfolio is likely not the only resource you have in place to support your objectives in retirement. You will likely have Social Security but in some cases, there may be real estate assets, a pension, an inheritance, etc. Anything that you would use to support your lifestyle should be accounted for. At the beginning of this post, I mentioned the danger of a down-market when you are drawing heavily on your portfolio, but if you have other resources on which you can draw in the event of a down-market, then protecting against that volatility could be much less important.

3)     The likelihood your resources can support objectives and goals

If your resources can support your financial objectives and achieve your goals with investment gains, then you don’t need to take on any investment risk (of course this could mean that you have the ability to take on even more risk). But in most cases, some growth is necessary to meet one’s objectives. Bottomline, you need to determine the likelihood your resources can support you given different assumptions for return and volatility.

Generally, growth overtime comes with the tradeoff of short-term volatility. So the question to answer is how much volatility your resources can withstand and still have a high likelihood of meeting your needs. At Cordant, we use probability analysis to determine the likelihood that available resources can achieve a client’s objectives and goals based on historical risk and return assumptions (you can read more about how we do that here). Regardless of the methodology used, increased risk, will come with a greater range of outcomes and the bottom of that range is what is going to matter.

4)    Your comfort with risk in retirement

For many, it just feels different when the income faucet is turned off. While it’s difficult to know for sure how you will feel about your investment risk when you are retired, most people I talk to have a sense for this. In some cases, they know they can withstand a great deal of risk while they are working, but once they have made the decision to retire, they know that market volatility (the fluctuations in the value of their resources) will keep them up at night. If anxiety over the day-to-day value of your assets is going to cost you sleep over the next 30 years, that matters! Even if you can afford to take on a great deal of risk in your portfolio and not run out of money, it may not be worth it.

There is no one-size-fits-all risk profile for any investor at any age, but there is a solution to solving for the right risk: identify and understand these four factors so you that can determine the right amount of risk for you. And if you need help, ask for it!

Benchmarking Investment Returns & Flaw of Averages

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Investing – Simple and Complex

On paper, investing is simple – invest in a broad basket of stocks and over time you’re likely to achieve positive returns (historically speaking). Who hasn’t seen this chart before?
Source: Dimensional Fund Advisors

 

However, in practice, investing gets a little more complex when things like time-frame, objectives and preferences get factored in.

 

Emotional Rollercoaster

From there, matters get more complicated because we’re humans with complex emotions that can cause us to do crazy things, often defying logic.  This emotional reaction defies the “buy low, sell high” method that is generally accepted as a sound investment strategy.

Source: Dimensional Fund Advisors

 

As depicted above, ample research has shown that investors tend to get over-confident when times are good and fearful when markets are down. This emotional reaction can often be caused by a lack of historical context and proper expectations.

Flaw of Averages

Tracking data is a good thing if done properly. Like lots of things worth improving, measuring yourself against a benchmark can help track your progress towards a goal. However, when it comes to tracking your investment success, the use of data and benchmarks can be a detriment to one’s success when done improperly.

When analyzing returns or making an assessment on the current state of the stock market, the natural thing to do is make snap judgements by comparing current returns to the historical average benchmark. However, as often is the case with investing, doing what feels right might not be in the best interest of the investor. Let’s take a look at some data.

 

The S&P 500 Index is a commonly used investment benchmark that roughly tracks the largest 500 companies in the US. Because we have quality data going back to the 1920s, the S&P 500 is a good proxy for the stock market and used by many investors to benchmark against. Since its inception, the S&P 500 has an annualized return of roughly 10%. But is 10% the appropriate target? Let’s take a look at the data:

The chart below does a great job setting investors’ expectations by showcasing the entire range of returns over the last 90+ years. The shaded band marks the historical average (10%), plus or minus two percentage points (i.e. 8% to 12%). As you’ll see, only six (orange dots) in 93 years fell within that range.

Source: Dimensional Fund Advisors

 

Using the historical average for a benchmark can be dangerous. As depicted in the emotional rollercoaster chart earlier, calendar years when markets return above the average may lead investors to feel overconfident and take on more risk, ultimately derailing a sound strategy. And years when returns underperform the average can lead to the feeling of “something is wrong” causing investors to want “fix” something when the best action is to most likely to do nothing.

At best, investing like this will lead to a crummy experience, and at worse, material damage to an investor’s bottom line – positive returns. Don’t ride this rollercoaster. Get educated on the historical range of returns for your portfolio and make sure you’re comfortable with that range.

Diversifying Your Company Stock: Strategies For Navigating The Benefits of Diversification VS. The Cost of Paying Taxes (Part 2)

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This past weekend, I had the joy of watching the movie The Sandlot with my 7-year old daughter and 4-year old son. My joy came from my kids laughing at all the moments in the movie that I laughed at the first time I saw it 25 years ago. They particularly enjoyed this scene and learning what a “pickle” is in baseball (for those who aren’t familiar with a pickle in baseball, here are some good examples). If you haven’t seen The Sandlot, the predicament (or “the pickle” as to which it is referred) the characters in the movie find themselves in is that they accidentally hit a baseball signed by the great Babe Ruth into a yard that has a legendarily vicious dog prowling about. So, the pickle is: do the kids give up a ball signed by one of the greatest players in history? Or, do they risk severe canine retribution for trespassing and try to get the ball back? Tough decision. I’ll let you watch the movie to see how it played out, but just like investment decisions, a great deal of effort goes into attempting to minimize risk.

In Part 1 of this post we discussed how it is not uncommon for a long-time employee of a corporation to find themselves in a different kind of pickle. The predicament in this case being: do you sell your company stock and pay a potentially large amount of money in taxes? Or, do you keep the company stock and subject yourself to the risks that come with concentrating your assets in one company’s stock?

Fortunately, the latter predicament has more options than the kids in The Sandlot had, and last time, we discussed how the first option selling all the stock now and paying the tax might very well be the best option. Remember: a huge tax bill could very well be worth the benefit of diversifying a risk—especially if that risk could mean having to work 5 more years.  If, on the other hand, we determine that the risk of waiting to sell is palatable, or the tax benefits too great to ignore, then it’s worth considering other options for diversifying the stock:

Option 2 –Time Stock Sales to Limit Taxes

 

The longer one holds an individual stock, the longer they are subjected to the risks, but that time holding the stock could bring tax benefits with it. It may be worthwhile to consider timing the sales. In the case where one has a large holding of company stock, it is likely they have held the majority of the company stock for over a year and the gains will be taxed at favorable long-term capital gains rates. It may, therefore, seem like there wouldn’t be much benefit to selling in this year, next year, or in 5 years aside from tax deferral if they are ultimately paying long-term capital gains rates. However, there could be a huge tax benefit to timing the sales because that additional income will affect one’s total taxable income which is used to determine income tax rates.

Example 1

Take, for example, a married couple. Both spouses work and together, with bonus and salary, they have a taxable income of $300,000 after deductions. Under current tax law, this couple is in the 24% marginal tax bracket. If, however, their taxable income increased above $321,450, they would jump to the 32% marginal tax bracket (you can see federal tax rates here). Keep in mind, capital gains are counted in totaling taxable income. While long-term gains are taxed at favorable rates, gains will be counted in taxable income totals which determine the rate at which the rest of your income is taxed.

So, if that couple had an additional $100k in gains from selling company stock, they will now have a taxable income of $400,000.  Due to the gains generating from selling company stock, $78,550 of earned income ($400,000-$321,450) will be taxed at 32% instead of 24%. That’s $6,284 (8% of $78,550) of additional taxes owed on earned income that is in addition to the taxes they will pay on the capital gains.

But, if the married couple above is comfortable with the risk of waiting to sell stock to save on taxes they could consider these two options:

(a) – Sell in a lower taxable income year

It could be the case that a lower taxable income year is very near on the horizon. Using the example above, let’s say the husband plans to retire in 2020, and as a result, he won’t have income in 2021 and the couple’s taxable income will drop to $180,000 in 2021. Now, selling company stock and generating $100,000 in capital gains will have a very minimal impact on how their income is taxed because, regardless of the gains, they will remain in the 24% marginal income tax bracket. While it’s true that more of their income will be taxed in the 24% marginal tax as a result of selling the stock there isn’t nearly the jump in costs that we saw between the 24% and 32% brackets as illustrated above.

 (b) – Sell enough each year to fill their marginal tax bracket

Using the above example, the couple could sell as much stock as they could but only up to point of generating $21,450 in gains—the maximum amount they could generate without pushing into the 32% marginal tax bracket. They could then repeat this each year until all the stock is sold. Further, they could do this by selling the company stock certificates that have the highest cost basis first (the holdings with the smallest gains), so that they could diversify more stock up front and further minimize risk.

Bottom line, when it comes to taxes (and so many things in life) timing matters. If you deem the risk of waiting is palatable, there could be a tax benefit. Now, let’s look at one more option because it may be that the tax benefit of waiting is a big one, and the risk is such that one is willing to consider other means of limiting risk.

Option 3 – Time the sale but hedge for now.

 

 Example 2

In this example, imagine the couple from Example 1 has $400,000 of taxable income in ’19 and they will be well into the 32% marginal tax bracket.  However, they both plan to retire at the end of the year and they anticipate having $0 earned income in 2020 (they are both 63 and don’t plan to draw Social Security until 70). Further let’s imagine they have $750,000 in company stock that has $250,000 in capital gains. They would love to wait to until 2020 to sell the stock since they will have $0 in other income, but they also know that the value in that stock is what will allow them to stay retired.  They can’t risk it dropping by even 15% from its current price of $40/share.

This couple might consider these two hedge strategies:

Hedge 1 – Buy Put Options

Buying a put is when you purchase the right to sell someone your stock at a set price until a certain date.

In this example, the company stock the couple owns is priced at $40 today. If they are concerned that their retirement is in jeopardy if the price drops below $35 between now and January 1st of 2020, they could buy the right to sell the stock at $35 until January 1st of 2020. This is called buying a put. In this example let’s say that the put option costs $1/share for easy numbers.

If the stock drops below $35 they’re max loss is the $5/share they lost plus the $1/share cost of the puts they purchased even if the stock goes to $0.

If the stock goes up, they benefit from the value increase minus what they paid for the put options.

Buying puts can be expensive, but in an example like this it could be well worth the downside insurance provided while still allowing the couple to enjoy potential upside.

Hedge 2 – Buy Puts and Sell Covered Calls (also known as a “collar”)

In this strategy, to offset the price of the put, the couple could sell covered call options in addition to buying puts. Buying a put and selling a covered call on the same stock is called a “collar” because it limits the outcomes on the upside and the downside.

Selling a covered call is when you sell someone else the right to purchase stock that you own for a set price until a specified date.

Returning to the example, the stock is worth $40 today. The couple could sell someone else the right to purchase the stock for $45/share before Jan 1st of 2020. If their stock went up to $50, the purchaser of the call could exercise their option and purchase the stock from the couple for $45. The couple would miss out on that additional $5/share of upside resulting from the stock rising above $45 but selling these covered calls would have compensated them for the puts they purchased.

Here, the couple has given up the benefit to the stock rising above $45 but eliminated the downside risk of the stock falling below $35. While they won’t benefit from much potential upside, they have hedged the risk and can safely hold the shares until they can sell them in the more favorable tax environment that awaits them in 2020.

Keep the Objective in Mind

There are even more options than what I’ve written about here, and more nuance to those that I’ve described, but in determining what to do with company stock the most important thing is to keep your ultimate objective in mind.

In most cases, if you have company stock, the stock’s value is a means to an end. Likewise, the money you save in taxes can be used as a means to the same end. The end could be retirement, a child’s wedding, a charitable donation, etc. Whatever the desired objective may be, when you make a decision about selling company stock, do so with the objective top of mind. This will help you evaluate the true risks of waiting and the benefits of potential tax savings. It’s easy for one to say that they are comfortable with a 20% decline in the value of an asset, but it’s much more difficult to be comfortable with a similar decline in the likelihood one can achieve a specific objective (e.g., a 20% likelihood I won’t be able to retire when planned). Keeping the objective in mind will help clarify the best option and make it feel like less of a pickle.

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