Should I sell my company's stock and exchange it for an SP500 index fund?

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schlesinger
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Should I sell my company's stock and exchange it for an SP500 index fund?

Post by schlesinger » Mon May 18, 2015 11:07 pm

About 50% of my financial assets are in my company stock (grants and stock purchase plan) and the rest is in a diversified mix of US/intl stock. It makes me a little nervous to have so much in my company's stock because it goes against recommended advice. Should I start gradually selling my company's stock and exchanging the proceeds into my regular taxable stock index fund?

Pros:
Can diversify my assets
Won't lose my job and my assets at the same time if company does poorly (very unlikely; management is known to be a class act and they're hiring like mad right now)

Cons:
I don't want to trigger a tax event and pay tax on capital gains (a 10-20% haircut) just to exchange the proceeds for stock ETFs
I don't need the money now or in the forseeable future, so there's no point in the exchange
The company is cheaper valuation-wise than the SP500 right now so the individual stock seems less likely to be overvalued
The company has a beta less than the SP500 so it seems safer
I don't intend to stay at one company for more than a few years so my lose-my-job risk is capped
I personally believe in my company's fundamentally strong blue chip business and want to hold it as close to forever as possible

I'm leaning towards the easiest path which is do nothing and continue to let my stock purchases and grants accumulate. Am I missing any important information in this analysis?

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Sents
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Sents » Mon May 18, 2015 11:18 pm

50% of assets in a single stock is extremely risky, regardless of the situation. Why not cut it down to at least 25%? I personally wouldn't want more than 5-10% of my assets in any single stock.
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Louis Winthorpe III » Mon May 18, 2015 11:21 pm

Yes. You're taking on way too much single company stock risk, and you aren't being compensated for it. Bite the bullet and pay the taxes. I'm sure your company is safe, but a lot of Enron employees didn't want to sell and pay taxes either. It's nuts to stake so much of your financial well-being on the health of one company.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by 2comma » Mon May 18, 2015 11:35 pm

From your analysis you know what responses you'll get here. Might be a good chance that stock will do very well and in 10-20 years you'll rue the day you sold it. But that's what I'd do.
If I am stupid I will pay.

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schlesinger
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by schlesinger » Tue May 19, 2015 12:13 am

- Isn't a 20% tax a pretty high transaction cost that should be avoided? It seems like I'm deciding between Asset A and Asset B where I can exchange $100 of asset A for $80 of asset B. That seems nuts unless I think Asset B is worth more, even though the market says they're equal in price.

- What exactly does single stock risk mean in this situation? My company's stock has low beta to the S&P500, and has a lower valuation, so it seems to me like the SP500 is a riskier asset. The S&P500 has dropped 50% in a year before; financial companies like Lehman Brothers or Enron have way overleveraged, but that's unlikely to happen to a non-financial, non-oil company with profits and a huge cash hoard.

Median Joe
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Median Joe » Tue May 19, 2015 12:20 am

How about this plan:

1. Sell any new grants/ESPP immediately going forward.
2. Of the existing shares, sell the ones with least capital gains (and all with capital loss, if any) now.

This is assuming that you do want to diversify despite your personal belief in company stock performance.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by toblerone » Tue May 19, 2015 12:51 am

schlesinger wrote:What exactly does single stock risk mean in this situation? My company's stock has low beta to the S&P500, and has a lower valuation, so it seems to me like the SP500 is a riskier asset.
Diversification is the so-called free lunch, or cheaper lunch. It will lower volatility without lowering expected return, or increase return without increasing volatility, depending on who you ask. Having a large % in a single stock is uncompensated risk. As least that's what I tell myself. I've been here two years and still trying to wrap my head around it, but it makes sense.

2comma
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by 2comma » Tue May 19, 2015 1:06 am

That's what I thought you were thinking and it is your boat, you can do whatever you want with it and I mean that. But,

You've forced me to give you my boring Bernie story. No not Bernie Madoff, Bernie Ebbers (WorldCom). Back when the market was screaming and we were all thinking high tech stocks were great investments, and we were in high tech so we should know, I got two "sort of inside stories" about the company. A senior telecom executive of my mega corp thought they were the greatest thing since sliced bread (for our companies communications needs). And we hired a kid that had worked there, I was researching the stock and probed him about how cost conscious the company was reported to be. He said he had gone to Bernie's secretary and asked where he could get some paper clips and she said... how many do you need - reached into a drawer and pulled out a box of paper clips ready to dispense some. So now I had found a stock with great fundamentals, seemed to impress mega corps and they had a firm handle on keeping expenses down. I was convinced! We hired a girl that worked at WorldCom who was driving into work one day and wondered why so many cars were heading the other way so early in the morning. The company was no more... No warning, no expert predicting, nothing. That is what single stock risk is all about.

If it skyrockets for years and then you get the notion that there are bad time ahead, how will feel about taxes when you need to liquidate it then?
Last edited by 2comma on Tue May 19, 2015 1:12 am, edited 3 times in total.
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by jackholloway » Tue May 19, 2015 1:06 am

I knew people at 3Com, AOL, Lehman and WaMu. None of them expected to lose everything they had in company stock.

You are not trading equal assets, you are trading a single asset for a diversified collection, which should have lower volatility. This has tax consequences it would not have had you sold on grant. If it has gone up faster than the market since then, congratulate yourself.

Boats day
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Boats day » Tue May 19, 2015 1:10 am

Easy answer

Sell sell sell

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by SQRT » Tue May 19, 2015 6:56 am

You will get almost unanimous advice to sell. From a financial theory/risk management perspective, this is the right advice.

But, I was in your position when I worked for a large Canadian Bank. I took advantage of all opportunities to invest in my employers stock and indeed for most of my career I had ownership requirements as a senior exec. This worked out extremely well for me. Once I retired I have tried to diversify but since my tax cost basis is so low there is a significant cost to doing so. Will continue to diversify but gradually over time. My current concentration in the employer's stock is even higher than yours. Good problem to have but a problem nevertheless.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by livesoft » Tue May 19, 2015 7:04 am

My answer would be different if you have only $5,000 in company stock versus $500,000 in company stock.
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by 691175002 » Tue May 19, 2015 10:12 am

You can also offset the risk of the position without selling, although this is generally only cost effective in specific situations.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by conroy » Tue May 19, 2015 10:39 am

I'm not going to give an opinion on whether to sell or not, but if you decide to sell, be aware of the timing to watch out for wash sales, especially if you are still accruing stock periodically, whether via grants/SPP/whatever.

Basically, if you receive stock less than 30 days after selling for a loss, you cannot claim that loss on your tax return (with a few exceptions). Instead, the basis of the new stock you've acquired will be lowered; this can be a pain to keep track of, especially if you do this multiple times. It also means that you may end up having to pay more tax than expected, because you have to report any gains but can't claim any losses.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by freelittlebirds » Tue May 19, 2015 11:27 am

schlesinger wrote:- Isn't a 20% tax a pretty high transaction cost that should be avoided? It seems like I'm deciding between Asset A and Asset B where I can exchange $100 of asset A for $80 of asset B. That seems nuts unless I think Asset B is worth more, even though the market says they're equal in price.

- What exactly does single stock risk mean in this situation? My company's stock has low beta to the S&P500, and has a lower valuation, so it seems to me like the SP500 is a riskier asset. The S&P500 has dropped 50% in a year before; financial companies like Lehman Brothers or Enron have way overleveraged, but that's unlikely to happen to a non-financial, non-oil company with profits and a huge cash hoard.
You are going to have to bite the bullet eventually. Biting it now might be your best scenario. Suppose you hold the stock for 30 years and it starts going down and you want to sell it - if you think the tax implications are bad now, they'll be worse then. What if the stock goes down and you hold it to avoid LTCGs down the road - it could potentially end up affecting your portfolio to such a degree that the tax consequences pale in the end. The stock might end up owning you instead of the other way around.

If you are in your 20s, if the stock goes up then great but if it doesn't you've lost ground that's going to cost you dearly down the road. You may have to fork in 100k when you are 40 to make up for that beautiful stock. But you'll be a billionaire by then, right? My advice, you are at a point where things can really add up. You have that choice that most did not have or were not educated enough to have or were not fortunate enough due to debts or smart enough because they chose the stock. Be smart!

I assume you've held it long enough to be a long term capital gain although your short term capital gain might not be much different depending on your taxable income but confirm it.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by billern » Tue May 19, 2015 11:31 am

Unless you hold the stock until you die, the stock drops in value, or you are in a low tax bracket when you sell, you will pay capital gains tax on the sale.

There is a benefit to holding the stock (dividends and appreciation on the amount invested that you would have to pay in taxes if sold today) but the trade-off is not as significant as you think.

Hold the stock long enough to be taxed as long-term capital gains (when available) and then sell.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by walletless » Tue May 19, 2015 12:56 pm

Do you have anything that you have held for more than a year?
I am in agreement with everyone else on this thread that you can sell 20-25% right now (pick long term shares first, then sell ones with highest cost basis to reduce the tax bill).. Then DCA out as your positions become long.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by bloom2708 » Tue May 19, 2015 1:23 pm

I would sell it, pay the tax and get it nicely diversified in index funds. I worked for a large software company for 18 years. I was amazed at the smart people that just accumulated shares and never sold any. In some cases other than equity in homes/401k that was their entire net worth. All in one stock.

The stock was also a huge component of the S&P 500 index. So on top of all the shares owned, they owned another chunk in the mutual funds they held. To diversify, they bought several different large cap funds which all had nearly the same top 10 holdings that included the very same stock. :oops: Next, their job and income was 100% tied to the same company.

We got into a rhythm of selling any ESPP and Stock Award shares as soon as they hit the brokerage account. Within a few days there was never a large gain/loss so that didn't matter.

From my experience you could "miss out" on that big windfall. But several times the stock would pop after good earnings and yet nobody sold then either. Because it could keep going up. It didn't and ended up back down again. But it could have!

Let us know what you decide to do. Step 1: Diversify. Step 2: Diversify. Step 3: Repeat steps 1 and 2.
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by MN-Investor » Tue May 19, 2015 1:44 pm

Think of this in another way.

How much should you have saved at this moment in order to be on track for retirement?

Say, for example, that you should have $100,000 saved at this point in order to be able to retire at your target retirement date. If you have $100,000 saved in non-company stock, plus $100,000 in company stock, that's ok. Your company stock could go to zero and not affect your retirement. If, though, it's $75K each, then sell enough company stock so that you can increase the non-company savings to that $100K current retirement goal.
The key to success - Save early, save often, invest well.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by PatrickA5 » Tue May 19, 2015 1:53 pm

My former megacorp would contribute all of the 401K company match in stock. You could not sell it. I watched this once proud "can't miss" company's stock go from $50 to 75 cents. Once the stock got to about $4, the company relented and allowed employees to sell company stock, but by then it was too late for most of us. I lost a third of my 401K balance in a matter of about 6 months.

Ask yourself this question. Instead of having all of that company stock, imagine you had a wad of cash. Knowing what you know now, would you use that wad of cash and go purchase that stock on the open market today? Why or why not?

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by CT-Scott » Tue May 19, 2015 2:21 pm

Unless you have inside information about an upcoming deal, etc. that his highly likely to make the stock price increase short-term, my advice would be to sell it. The one fine point I'd add is that if you have some stock due to hit the 1-year mark very soon, then go ahead and hold off a short while on that stock so that you can get the long-term capital gains rate. For any stock that's already past that mark, or nowhere near that mark, sell that as soon as possible.

Of course, remember that you need to be on board with this plan and be able to live with the consequences regardless of what they are. If you sell today and the stock doubles in price tomorrow, you need to be able to be OK with that (it's best not to follow the stock price once you decide to sell).

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Clever_Username » Tue May 19, 2015 3:17 pm

I'd sell it, but I'd reconsider using an S&P 500 index fund. Make it part of your total portfolio as appropriate; how is your asset mix among domestic stock, international stock, and bonds? Even if you want domestic stock, you might find a total stock market index fund more to your liking.
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Professor Emeritus » Tue May 19, 2015 3:38 pm

schlesinger wrote:- Isn't a 20% tax a pretty high transaction cost that should be avoided?.
its not the 20%, its the return on the 20%. You already owe the government 20 % payable when you sell the stock.

until you sell you only have a Paper gain'

You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by tyrion » Tue May 19, 2015 3:41 pm

You should have a plan.

'Do nothing because I don't want to pay capital gains' is not a plan.

'Sell 10% every year' is a plan.
'Sell ESPP shares when they can be sold as long term capital gains' is a plan.
'Sell when my company shares exceed 25% of my stock allocation' is a plan.

Come up with a plan that works for you. As the examples have shown, having half of your net worth invested in one stock is foolhardy. Even if it appears to be a good company to work for and stock to own.

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ogd
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by ogd » Tue May 19, 2015 3:54 pm

You should absolutely sell.

Diversification is the only free lunch in the market -- you get to reduce risk while receiving the same risk-adjusted returns as you did before. It diminishes after the first N companies, but at 50% stocks in a single company the risk reduction effect is strong and very much worth the (small) advantages below.

This is the case for a position of this size in any company. In the short term while you are still working for this company, the risk is even scarier.

The tax situation will only get worse over time. If you sell now you can settle into investments that you'll hold for a much longer time. The thing you'd be saving by holding is not capital gains tax, but capital gains tax deferral, which is worth up to about half of the tax rate, but only if deferred over LONG periods of time, several decades. Holding this much stock for this much time would be a bad idea.
schlesinger wrote:The company is cheaper valuation-wise than the SP500 right now so the individual stock seems less likely to be overvalued
The company has a beta less than the SP500 so it seems safer
I personally believe in my company's fundamentally strong blue chip business and want to hold it as close to forever as possible

These are all stock picking criteria. There's no reason to think that one can better estimate the fair price for all these things (lower beta, fundamentally strong business) better than the market composed of professionals who do this for a living. You might have more insider information (although if it's not available to the analysts this would be very much illegal), but this is balanced by the employees' tendency to wear the rosy glasses that are passed around in every meeting and email.

If these were stock options there'd be other considerations, but if it's plain shares then you should sell most or all of it asap.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Johno » Tue May 19, 2015 4:54 pm

schlesinger wrote:- Isn't a 20% tax a pretty high transaction cost that should be avoided? It seems like I'm deciding between Asset A and Asset B where I can exchange $100 of asset A for $80 of asset B. That seems nuts unless I think Asset B is worth more, even though the market says they're equal in price.

- What exactly does single stock risk mean in this situation? My company's stock has low beta to the S&P500, and has a lower valuation, so it seems to me like the SP500 is a riskier asset. The S&P500 has dropped 50% in a year before; financial companies like Lehman Brothers or Enron have way overleveraged, but that's unlikely to happen to a non-financial, non-oil company with profits and a huge cash hoard.
1. This one has been answered, but to put another way, the correct value to record now for the stock is nominal value minus deferred capital gains tax. A stock you bought for $10,000 that's appreciated 100 fold since you bought it (ie is almost all capital gain) isn't really worth the $1mil, it's worth ~$1mil*(1-cg tax rate). Thinking of it as being worth $1mil and the $1mil*cg tax rate as a 'transactions cost' isn't correct and can lead to all kinds of mistakes. Same goes for traditional (pretax) IRA/401k: people are kidding themselves to imagine those are worth full face value. CG tax rate or future IRA ordinary income rate may be uncertain, but unlikely to be zero. The main exception to this rule is cg tax, if as mentioned you reasonably expect not to need to or choose to sell the stock in your lifetime, and are willing to assume the basis step-up feature of the tax code won't change and will wipe out the capital gain for your heirs. But it sounds like you're pretty young and haven't necessarily totally hit the jackpot yet, so that's probably not realistic.

2. Beta is a measure of relative movements of a stock's price *which are correlated to movement in the rest of the stock market*, call 'the market' the S&P 500 for argument's sake. It's not a measure of total risk. In the model of the world in which the concept of beta was derived, there are two sources of risk: market risk, the portion of the stock's movement completely correlated to the market; and firm idiosyncratic risk, the portion completely uncorrelated to the market. Beta just measures the relative influence of the 'market' risk factor on the stock. Holding just one stock you must also bear the firm idiosyncratic risk, whereas when holding equal size positions in just a few dozen stocks the firm idiosyncratic risk of each is virtually entirely diversified away. So beta tells you nothing about the relative total risk of holding one stock v holding a bunch of stocks or the whole market. The beta's of stocks are only useful to tell you the relative risk of a certain diversified subset of stocks in the market. IOW if you have 20 different low beta stocks, then beta might tell you that's less risky than the whole S&P (under that model of the world, which probably has more validity than not, though no simple model describes the world).

In practice it's true that entirely concentrating risk in some companies' stock is more dangerous than entirely concentrating risk in other companies' stock. But beta doesn't tell you anything about that, and it's unlikely that holding any single stock would be less risky than holding the whole S&P, especially considering a long time horizon and worst case outcomes.
Last edited by Johno on Tue May 19, 2015 5:21 pm, edited 1 time in total.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Pizzasteve510 » Tue May 19, 2015 4:59 pm

I had a friend with over 80% of his net worth in about a million in vested stock options in a firm with 10 years of double digit growth. I suggested diversifying but he said nothing could match the leveraged growth he had been getting.

He lost his job and most of his nest egg without notice along with 5000 others when a financial scandal associated with the company hit the news. Of course the options became vested and worth so much because he also held them through 5-10 years of the rapid profit growth and he took his performance bonus in options (an aggressive move seen as being a team player in the company culture, which helps him advance) so that is something to consider too. His options went from thousands to over $million.

It's your call. Some market timing and risk tolerance type analysis/introspection may be required.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by inbox788 » Tue May 19, 2015 6:20 pm

Yes, diversify!

What is your tax bracket? Will you be in a lower tax bracket in the future? You're going to pay taxes either now or later, so the tax is likely to be a wash.

Assuming you're 50% in company stock and 50% diversified, if you do nothing, in 3 years, what percentages be?

In a worse case year where the market tumbles 50%, we're all on the same economic boat, but if your company goes under, you not only lose your job, but your portfolio falls 75%. Can you live with that doomsday scenario?

Now a few short term bandages may be used in limited situations, but I don't think they apply to you.

You could buy "insurance" against worst case situation, let's say you owned IBM @ 175, so you buy 150 Jan 2017 puts for $10.50. For a 6% premium, you "insure" about 80% of your value. Has your company stock beat the SP500 or overall market by 6% margin for the last 5 years (each and every year)? And will it going forward?

You could also buy a collar, IBM Jan 2017 buy 160 put (13.95)/sell 180 call (13.30) for less than a dollar.

These are complicated and may be costly, so the simplest thing to do is to sell and diversify.

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sometimesinvestor
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by sometimesinvestor » Tue May 19, 2015 7:50 pm

Agree with most of the comments especially those of Tyrion. If you think the company is wonderful and the stock promising sell 10% each year for the next three years. I think the 20% left might still be too high but you may know more about the company merit. 50% is just too imprudent. Even great companies like GE IBM and Xerox can become awful investments.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by BigJohn » Tue May 19, 2015 7:59 pm

You've been fortunate to date and having significantly appreciated company stock is not a bad problem to have but... why tempt fate. I was in your position at one point and here's how I handled. Pick an amount of company stock your comfortable holding (say 5% of total assets) and how long you want to take to get there (say 2 years). Then sell one eight of the shares you want to divest on the first day of every quarter. Don't look at the price, don't try to time the market, just put it on autopilot as sort of a reverse dollar cost averaging approach. Also, for all new grants, sell immediately upon vesting.

goldendad
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by goldendad » Tue May 19, 2015 9:51 pm

Yes you should.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by jlawrence01 » Tue May 19, 2015 10:43 pm

I would agree with most that yes, you should diversify your portfolio away from your company stock. However, there are a couple caveats.

1) Some corporations expect senior and near-senior managers to hold a certain amount of the company's stock. That varies on your employer.

2) If you are in a financial position or in senior management, you need to understand the times in the fiscal year where stock sales are blacked out to avoid any issues with insider trading.

Do realize that if you work for a large, publicly traded company, stock sales of employees may be monitored.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Blender » Tue May 19, 2015 11:26 pm

Lots of eggs and only one basket.

You may think your company is solid and going places but things can turn quickly, even for the best of them. You could get laid off simultaneously while the stock price tumbles. Think of it this way, you are already heavily invested in your company by simply having a job there, no need to own company stock as well.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by toast0 » Wed May 20, 2015 12:50 am

Yes, absolutely sell as soon as you can, or at least as soon as you've hit the holding period for favorable tax treatment.

For ESPP, don't get greedy: take your discount % as free (taxable) income, and call it a day; maybe hold out for a qualifying disposition; either way, make sure you report your cost basis correctly, brokerage statements can be misleading :annoyed

You probably have more grants that will vest over time, if there's a significant rise in the stock price, you'll see it there. If there's a significant drop in stock price, you don't really want to see it what's already vested. :)

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schlesinger
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by schlesinger » Wed May 20, 2015 1:24 am

Thanks for all the responses guys.

You're right, the tax thing is a wash. I guess I just want to delay the pain of taking the tax hit. I also feel like I will be in a lower tax bracket in the future.

There's no limitations on when I can sell stock, so that's not an issue.

I don't think having a job with a company means heavily invested in that company. In today's labor market no job is safe and it seems safest to think of yourself as a contractor based on your skills alone. It's pretty common for the stock price to go up after layoffs occur if there's a crisis. But if there isn't, it doesn't make sense to work so hard yet have no participation in the upside of the company and the result of your labor (what I work on directly affects products). I would be so annoyed if I worked on something that generated profits and I didn't participate in that upside in the stock because I wasn't an owner. I don't think anyone's going to get any major wealth from being a wage earner. So in summary -- "I have a lot of eggs in one basket, but it's OK if it's my basket"?

For people who are saying "this is stock picking criteria" -- it seems to not make sense that the sell-sell-sell advice will be the same regardless of whether I work for a company like DIS, AAPL, and WFC or if I work at Zynga or Radioshack. I think it's irrational to think of every company as a potential Enron even if that company has proven to be high quality and has a huge cash balance. Selling because you're afraid of sudden massive accounting fraud in a blue chip American company like DIS, KO, AAPL, or WFC, while not impossible, seems unlikely enough that it shouldn't be the basis for which you should make major financial decisions.

Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies. I know it's diversified, but so is an index of high-yield bonds whose companies are, by definition, kind of crappy. However, I will lessen the risk by gradually selling. eventually.

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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by BigJohn » Wed May 20, 2015 1:35 am

schlesinger wrote:Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies.
With no disrespect intended, I'll bet the employees at Enron felt just the same way. Obviously it's your call and if you want to take the risk and sit tight you might come out way ahead.

Best of luck with whatever decision you make. :sharebeer

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schlesinger
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by schlesinger » Wed May 20, 2015 2:33 am

"it might become the next Enron" is an acknowledged risk that i'm willing to take
Last edited by schlesinger on Wed May 20, 2015 2:49 am, edited 1 time in total.

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Hawaiishrimp
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Hawaiishrimp » Wed May 20, 2015 2:42 am

schlesinger wrote:About 50% of my financial assets are in my company stock (grants and stock purchase plan) and the rest is in a diversified mix of US/intl stock. It makes me a little nervous to have so much in my company's stock because it goes against recommended advice. Should I start gradually selling my company's stock and exchanging the proceeds into my regular taxable stock index fund?

Pros:
Can diversify my assets
Won't lose my job and my assets at the same time if company does poorly (very unlikely; management is known to be a class act and they're hiring like mad right now)

Cons:
I don't want to trigger a tax event and pay tax on capital gains (a 10-20% haircut) just to exchange the proceeds for stock ETFs
I don't need the money now or in the forseeable future, so there's no point in the exchange
The company is cheaper valuation-wise than the SP500 right now so the individual stock seems less likely to be overvalued
The company has a beta less than the SP500 so it seems safer
I don't intend to stay at one company for more than a few years so my lose-my-job risk is capped
I personally believe in my company's fundamentally strong blue chip business and want to hold it as close to forever as possible

I'm leaning towards the easiest path which is do nothing and continue to let my stock purchases and grants accumulate. Am I missing any important information in this analysis?

Which company and how much we are talking about here?
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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ogd
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by ogd » Wed May 20, 2015 2:48 am

schlesinger wrote:For people who are saying "this is stock picking criteria" -- it seems to not make sense that the sell-sell-sell advice will be the same regardless of whether I work for a company like DIS, AAPL, and WFC or if I work at Zynga or Radioshack. I think it's irrational to think of every company as a potential Enron even if that company has proven to be high quality and has a huge cash balance. Selling because you're afraid of sudden massive accounting fraud in a blue chip American company like DIS, KO, AAPL, or WFC, while not impossible, seems unlikely enough that it shouldn't be the basis for which you should make major financial decisions.
I was the one who said "stock picking criteria" and I said nothing about Enron.

The reason stock picking criteria don't work, and the same reason why no particular company is a good investment, is that every stock has a price. The nice one have high prices, the crappy ones have low prices. From this price, any company has equal chances to underperform, no matter how well it looks right now, unless your guess is better than the market, and I don't think it is. People with far more qualifications and computers and news feeds than you are making these guesses, and they are still doing a worse job than the aggregate (i.e. "wisdom of the crowds").

Your company, without knowing or needing the stock ticker, is an average investment as far as you can know. As part of a diversified portfolio, that is. On its own, it's a poor investment because you've taken the risk of the portfolio stock and magnified it, without getting higher returns (again, as far as you can know).
schlesinger wrote:Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies. I know it's diversified, but so is an index of high-yield bonds whose companies are, by definition, kind of crappy. However, I will lessen the risk by gradually selling. eventually.
Welcome to the twisted world of investing, where the companies that are "kind of crappy" are the ones who outperform historically. Read up on value vs growth. It's, once again, all about the price: people get excited about high growth stocks and end up paying too much; these stocks do grow very nicely, it's just not enough to compensate for the price.

At least, this is the case historically. Going forward, who knows, but the "avoid crappy" thesis, and your "super solid" investment thesis, haven't held water very well.

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packer16
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by packer16 » Wed May 20, 2015 5:30 am

One alternative may be to hedge (go short a proportion of the stock you hold) as you sell over time. This will lock in today's price for a portion of the stock and you can think of this as part of your fixed income allocation until you sell. The biggest issue I see with selling today is taxes. If you can stretch it out over a number of years then the tax hit will be smaller. The only exception to the sell some advice I would give is that if the stock you are speaking of Berkshire Hathaway which in my mind is a low cost fund of business run by the best capital allocator in the world. Would you mind telling us what company it is as that might influence what portion of your current position you may want to retain.

Packer
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Lynette » Wed May 20, 2015 5:50 am

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Last edited by Lynette on Tue Jan 08, 2019 8:18 pm, edited 1 time in total.

cherijoh
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by cherijoh » Wed May 20, 2015 7:28 am

schlesinger wrote:About 50% of my financial assets are in my company stock (grants and stock purchase plan) and the rest is in a diversified mix of US/intl stock. It makes me a little nervous to have so much in my company's stock because it goes against recommended advice. Should I start gradually selling my company's stock and exchanging the proceeds into my regular taxable stock index fund?

Pros:
Can diversify my assets
Won't lose my job and my assets at the same time if company does poorly (very unlikely; management is known to be a class act and they're hiring like mad right now)

Cons:
I don't want to trigger a tax event and pay tax on capital gains (a 10-20% haircut) just to exchange the proceeds for stock ETFs
I don't need the money now or in the forseeable future, so there's no point in the exchange
The company is cheaper valuation-wise than the SP500 right now so the individual stock seems less likely to be overvalued
The company has a beta less than the SP500 so it seems safer
I don't intend to stay at one company for more than a few years so my lose-my-job risk is capped
I personally believe in my company's fundamentally strong blue chip business and want to hold it as close to forever as possible

I'm leaning towards the easiest path which is do nothing and continue to let my stock purchases and grants accumulate. Am I missing any important information in this analysis?
Would you even consider investing 50% of your assets in a single stock if it were not the company for which you work? You are taking on additional uncompensated risk for both a single company and a single industry. Why?

You seem to be focusing on "I don't think I'd lose my job if the company tanked" and not the fact that you could lose the majority, if not the entirety, of your investment! The fact that your company management is a class act has absolutely nothing to do with how the stock performs in the future. A stock can announce a decent profit, but if the analysts were expecting a few cents more, it can take a big hit - especially if the competition did a little better than expected. Who need that headache?

Look at it this way - if your company continues to do well, then you will still be faced with the capital gains issue down the road - doing nothing is just kicking the can down the road. The other possibility is that the stock price will fall and the capital gains will disappear. That would solve your tax haircut issue, wouldn't it? :oops:

You are letting the tax tail wag the dog. I learned that lesson back before the tech stock bubble when I didn't sell an actively managed small-cap fund that was loaded with overvalued NASDAQ stocks. I watched the capital gains mostly disappear and not recover. But at least I stopped investing in it and it was not a significant portion of my portfolio. You, on the other hand, could have a much more expensive lesson. Why take the risk?

cherijoh
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Location: Charlotte NC

Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by cherijoh » Wed May 20, 2015 7:55 am

schlesinger wrote: Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies. I know it's diversified, but so is an index of high-yield bonds whose companies are, by definition, kind of crappy. However, I will lessen the risk by gradually selling. eventually.
With that attitude, I am really puzzled as to why you are even following the Bogleheads. You just don't get it.

Every one of your replies has been "yeah, but..." I think everyone who posted a thoughtful reply to your post just wasted their time.

Blender
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Blender » Wed May 20, 2015 8:01 am

schlesinger wrote:Thanks for all the responses guys.
I don't think having a job with a company means heavily invested in that company. In today's labor market no job is safe and it seems safest to think of yourself as a contractor based on your skills alone. It's pretty common for the stock price to go up after layoffs occur if there's a crisis. But if there isn't, it doesn't make sense to work so hard yet have no participation in the upside of the company and the result of your labor (what I work on directly affects products). I would be so annoyed if I worked on something that generated profits and I didn't participate in that upside in the stock because I wasn't an owner.
It's true that labor can be a commodity but your line of work dictates how much. You are invested in your company, if they do really well you're more likely to get bigger raises, bigger bonuses, have more advancement opportunities. If they do well, you will likely do well. If they do poorly, you might do poorly up to and including being laid off. I think you missed my point. If there's a financial scandal or the market turns against them all of a sudden, the stock will tank due to those circumstances and that could trigger layoffs. The price may rise a little on the layoff announcements, but it would have already tanked, and you could be out of a job! And if it happens during an overall economic downturn and bad job market, well, your basket of eggs just fell onto the pavement. You are taking a very large, unnecessary risk by putting all your bets into this company.
schlesinger wrote: I don't think anyone's going to get any major wealth from being a wage earner
I disagree. Read 'Millionaire Next Door'.

Valuethinker
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Valuethinker » Wed May 20, 2015 8:01 am

schlesinger wrote:About 50% of my financial assets are in my company stock (grants and stock purchase plan) and the rest is in a diversified mix of US/intl stock. It makes me a little nervous to have so much in my company's stock because it goes against recommended advice. Should I start gradually selling my company's stock and exchanging the proceeds into my regular taxable stock index fund?

Pros:
Can diversify my assets
Won't lose my job and my assets at the same time if company does poorly (very unlikely; management is known to be a class act and they're hiring like mad right now)

Cons:
I don't want to trigger a tax event and pay tax on capital gains (a 10-20% haircut) just to exchange the proceeds for stock ETFs
I don't need the money now or in the forseeable future, so there's no point in the exchange
The company is cheaper valuation-wise than the SP500 right now so the individual stock seems less likely to be overvalued
The company has a beta less than the SP500 so it seems safer
I don't intend to stay at one company for more than a few years so my lose-my-job risk is capped
I personally believe in my company's fundamentally strong blue chip business and want to hold it as close to forever as possible

I'm leaning towards the easiest path which is do nothing and continue to let my stock purchases and grants accumulate. Am I missing any important information in this analysis?
I was once a millionaire in that situation-- am not now.

All kinds of things can happen to companies, many of which you cannot anticipate.

My bet? You should not be more than 20% in your company stock, and 35% of your total portfolio at max.

I would take at least 1/3rd of that money (that you have in your company) off the table. That would take you down to around 33% of your total portfolio?

For maximum diversification you should consider increasing your non US stock weighting. And your bond weighting.

Valuethinker
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Valuethinker » Wed May 20, 2015 8:03 am

packer16 wrote:One alternative may be to hedge (go short a proportion of the stock you hold) as you sell over time. This will lock in today's price for a portion of the stock and you can think of this as part of your fixed income allocation until you sell. The biggest issue I see with selling today is taxes. If you can stretch it out over a number of years then the tax hit will be smaller. The only exception to the sell some advice I would give is that if the stock you are speaking of Berkshire Hathaway which in my mind is a low cost fund of business run by the best capital allocator in the world. Would you mind telling us what company it is as that might influence what portion of your current position you may want to retain.

Packer
Many companies would restrict or prohibit employees going short on the company's stock. It would certainly be covered by insider dealing close periods (eg when the audit is going on).

I would not do this (nor buy Puts against my company's stock) without consulting with compliance, first. Making sure I had permission to so do in an email, not just verbal.

Valuethinker
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Valuethinker » Wed May 20, 2015 8:03 am

BigJohn wrote:
schlesinger wrote:Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies.
With no disrespect intended, I'll bet the employees at Enron felt just the same way. Obviously it's your call and if you want to take the risk and sit tight you might come out way ahead.

Best of luck with whatever decision you make. :sharebeer
They did, see the documentary 'Smartest Guys in the Room'.

Very few people (most notably the head of trading, who cashed in 200m and got out, 18 months before it blew) seem to have cottoned on to what was going on.

Valuethinker
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Valuethinker » Wed May 20, 2015 8:04 am

Professor Emeritus wrote:
schlesinger wrote:- Isn't a 20% tax a pretty high transaction cost that should be avoided?.
its not the 20%, its the return on the 20%. You already owe the government 20 % payable when you sell the stock.

until you sell you only have a Paper gain'

You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.
Thank you, good aphorism.

Money in stocks isn't money, it's potential money when you actually sell them.

Valuethinker
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Valuethinker » Wed May 20, 2015 8:07 am

Besides Enron, other distinguished cos we should mention:

- Nortel, once Canada's largest company and highest market cap stock (over 20% of the index)

- RIM (Blackberry)

- Worldcom

- Citigroup (once worth a lot more than it is now)

- Lehman Brothers - insiders held something like 20% of the company

- Bear Sterns - over 25% held by employees

- Nokia - once the world's largest phone manufacturer

Employees in all these companies saw massive destruction of their personal wealth (unless they sold).

Johno
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Re: Should I sell my company's stock and exchange it for an SP500 index fund?

Post by Johno » Wed May 20, 2015 8:12 am

schlesinger wrote: Part of my uneasiness is that I don't want to exchange a very nice stock with a bulletproof balance sheet for the SP500 which has (in my opinion) some really not great, overvalued companies. I know it's diversified, but so is an index of high-yield bonds whose companies are, by definition, kind of crappy.
On this point you seem to be stuck on the 'low beta' fallacy you stated initially. A lot of the risk of 'crappy' is going to be idiosyncratic. You're not taking this risk in a bunch of stocks because it's uncorrelated and tends to net out. Again, the meaning of 'beta' is relative sensitivity to the 'whole market' risk factor, not overall riskiness. Moreover as ogd and others pointed out, the market can see that your company is relatively more solid and other companies less solid. There's no a priori reason to think 'safe' companies are better investments as part of a diversified portfolio, unless you have specific inside (like senior management, can't legally trade on) knowledge or think the market is inefficient. But investment in one or a few of them take idiosyncratic risk which is not measured in 'beta', nor part of any other common risk/return measure...because a bedrock of Modern Portfolio Theory is that one wouldn't heavily concentrate risk in one stock.

A junk bond index like the S&P is highly likely to be less risky than any single stock, and less risky than the S&P, though I realize that's a kind of throwaway line based on the non-investing connotation of the word 'junk' and it's not really part of the discussion otherwise.

Theory aside though seems you have the right general idea practically. 50% in one stock is too much. Some smaller but still theoretically excessive concentration might be tolerable though not ideal. If you stop adding to the position and unwind what you have at some moderate pace, the concentration can be reduced to a reasonable level in a time frame in which it's reasonable to project a low likelihood of disastrous stock performance for the company relative to market (with no gtee). But that's the other thing: longer term it's extremely difficult to rule that out for *any* company. And longer term, 'disaster' can be in the form of opportunity cost, a 'blue chip' co that goes nowhere over a long period when the market returns a lot, a common outcome for all kind of companies in the past.

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