You work for a public company. Your RSUs are continuing to vest. The stock market and, more importantly, your company stock have dropped a lot in price. Even if you’ve been comfortably following a strategy with your RSUs, are you feeling a wee bit less certain about the strategy right now?
[Note: It feels a little weird to be “talking shop” while The World Is Ending (hyperbole makes me feel better). Perhaps it’s just simple distraction, but it’s also the case that life goes on in many ways. (Hopefully) you still have your job. Your RSUs are still vesting. You still need to understand your 401(k). So, I offer up this post in the spirit of helping you weather this … thing we’re living through as best you can. Because when we come out the other side, it’ll be really nice to have your finances in order.]
The basic question is: What should you do with your RSUs when they vest now? Sell them? Hold them in the hopes that the stock price will recover? Should you change the approach you’ve been following up until now?
Selling RSUs as Soon as They Vest Feels Good… When the Price is High
If you’re like most of my clients who receive RSUs in public companies, you have a strategy of selling most or all of your RSUs as soon as possible, ideally day-of-vesting. There’s no tax reason to keep them any longer than that (they are taxed as ordinary income the moment they vest…there’s no escaping that).
If you sold your RSU shares back in January or even February because of this strategy, you’re probably feeling pretty damn smug nowadays. One of my clients at Square emailed me recently to express her relief that “I sold in January at $80, and now it’s down to $50! I’m so happy I sold!”
But now your RSUs are vesting at the lowest price that your company stock has seen for a while. It’s a little painful to think of selling them at that low price. Should you change your strategy?
If you’ve been following a strategy up until now, think really hard about changing it just because the external circumstances have changed.
Figure Out What to Do Now that the Stock Has Lost Value
How should you handle your RSUs now? There is no single answer. And, to be honest, there was never a single answer.
Maybe we felt it was a simple question to answer for the last 10 years because the stock prices were always so comfortingly high.
But the reality has been the same this entire time:
We have no idea what stock prices are going to do when and for how long. A big drop in stock price scares us, and now we’re paying more attention to that fact.
Ask yourself these questions in an attempt to “triangulate” on the best strategy for our RSUs going forward:
Do you need cash? Rarely has there been a time when we realize just how damn important cash is. Do you have an emergency fund that can get you through 6 months of expenses? If not, those RSUs might just get you there and then your financial situation will be much safer, much more resilient.
After all, RSUs are really just a cash bonus, in the shape of company stock. If you got $5k in a cash bonus right now, would you rush right out to buy company stock with it? Or would you keep it as cash? If it’s the latter, then sell your RSUs.
Look at the company’s stock price. When was it last at that stock price? You might be surprised to see that the company was last at this price not that long ago. Maybe mid-2019? If that’s the case, ask yourself: Were you willing to sell the shares in mid-2019 at that stock price? If so, why are you unwilling now?
As of the date of this writing (March 25), some of the major tech companies have stock prices that they last saw in mid to late last year: Google, Amazon, Apple.
How much of your financial net worth is made up of company stock? The bigger the percentage, the riskier it is to keep the stock. If only 5% of your net worth is made up of, say, AMZN stock, then if AMZN stock continues to fall, it’ll hurt you only <this> much.
But if it makes up 20% of your net worth, then if it continues to fall, it’ll hurt you <that…much bigger> much. Which argues for continuing to sell the RSUs as they vest if your existing holding of company stock is already quite large.
Is this company stock “icing” on your financial cake? Or is it the cake itself? If you need the money wrapped up in this company stock, then you really can’t take many risks with it (holding it and hoping for a recovery is a risky maneuver). If your life and your goals can afford to lose that money, then you can afford to take the risk of holding on to it.
If you don’t sell them now, when will you sell? That’s perhaps the hardest part of market timing. If you don’t sell at this price, at what price do you start selling again? If you don’t sell as the RSUs vest, then you are definitely trying to time the market. This only has a chance of working well if you have objective rules that will dictate when you will sell. What are yours?
Do some thought experiments:
- 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 3 months, hell, let’s say in a year, in March 2021, the stock still hasn’t recovered its value. In fact, it’s worth less than it is today. (This is totally possible. Stock market falls can take years to recover.) How would you feel?
For example, say you hold your Google stock because $1102 (today’s price) is just too painfully low to sell at. Over the course of the next year, you watch the stock as it continues to fall in value. But maybe you have a solid cash emergency fund already in place. In March 2021, the stock is now at $800 per share. How would you feel?
- Let’s say you do sell your RSUs as they vest. And then 3 months from now, or again, a year from now, the stock price has recovered and then some. The stock price is above where it is today. How would you feel?
For example, say you sell your Google stock now at $1102. You have that cash in the bank. You have that cash to fall back on if economic times get rougher. Then in 3 months, it’s back up to $1500. How would you feel?
Either situation could have a mix of loss, regret, anxiety, fear, feeling stupid. Do you feel yourself pulled in either direction more strongly?
I hope that by thinking through all these questions, the answer to “Should I sell or hold my RSUs?” has become clearer to you.
Take care of yourself and others out there. Show kindness and empathy and, for a while at least, a lot of distance.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.