Thoughts on my ESPP

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JV
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Thoughts on my ESPP

Postby JV » Thu May 18, 2017 7:47 pm

The open enrollment period has begun for my company's ESPP. To date I've been a Boglehead and avoided individual stocks, so quite honestly I blew off this opportunity for the last couple of years. But I figured I'd take a second look and ask for everyone's thoughts:

The plan takes funds for a 6-month period, and then purchases company stock based on those contributions. The minimum holding period is 6 months after purchase, and the discount is 10%. It appears (and I need to confirm this) that the purchase price is either the lower of the price on: a) the first day of the contribution period, or b) the actual date of the purchase (which would be 6 months later).

Provided all of that is accurate, what are your thoughts on this? Worth it? If I enrolled, I'd sell at 6 months.

Jack FFR1846
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Re: Thoughts on my ESPP

Postby Jack FFR1846 » Thu May 18, 2017 8:28 pm

You have to decide if you're ok holding a stock for 6 months. I've been in a company where in less than 6 months, stock has gone from $48 to $12, so I would personally pass.

I'm in my company ESPP (bought monday, sold seconds later). Look at what happened Wednesday. You don't know what's going to happen in the market. I'm fortunate I can set a sale-on-vest for all upcoming ESPP purchases. It should settle tomorrow and I'll move the money into my checking account.
Bogle: Smart Beta is stupid

JV
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Re: Thoughts on my ESPP

Postby JV » Fri May 19, 2017 7:50 am

Jack FFR1846 wrote:You have to decide if you're ok holding a stock for 6 months. I've been in a company where in less than 6 months, stock has gone from $48 to $12, so I would personally pass.


It's something I'm not entirely comfortable with, but if I had a solid shot at a decent return I'd consider it. In the end, though, it just seems like a lot of trouble: getting the deductions started, monitoring it for 6 months, selling, dealing with taxable sales, etc. I was mainly curious how my ESPP compared to others. I see some ESPPs have zero holding period, which is obviously a major benefit, and some have higher discounts, like 15%.

Jack FFR1846
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Re: Thoughts on my ESPP

Postby Jack FFR1846 » Fri May 19, 2017 7:56 am

I would say that your plan is well below average. I've worked for many companies over my career and most of them take 15% below the lower of first and last day of the period and sell to you for this. They then allow immediate sale.

My current company does one better. They set the price and hold it for 2 years. If the stock drops below this price, it's reset and we get 15% below. So if the price goes way up over 2 years, employees make a killing. We just bought Monday. I pre-set the sell-on-vest, so it sold (and missed the mess of Wednesday). The gains just hit my checking account this morning. I'd say mine is an above average plan.

I don't know how common waiting periods are, but in the dozen tech companies I've worked for, none have had a waiting period.
Bogle: Smart Beta is stupid

dcabler
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Re: Thoughts on my ESPP

Postby dcabler » Fri May 19, 2017 7:58 am

At every company that offered it, I participated to the maximum extent allowed. There are two versions of plans I've been in
1. Most common. Price set at the first day of the quarter or last day, whichever is lower. Discounted 15%
2. Less common. Price set at the first day of the 6 month period or last day, whichever is lower. If the price is higher than the previous 6 month period, then the price for the current six month period uses the previous 6 month period. Then discount 15%. This was the best one I ever participated in.

In all cases, I sell immediately. By doing that, the worst-case risk is the difference between the closing price at the end of the period and the opening price on the next day, which is when I sell. I realize that not all plans may have the ability to have such a quick sale. Anyway, these are the same dollars I then end up investing in my taxable accounts.

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simplesimon
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Re: Thoughts on my ESPP

Postby simplesimon » Fri May 19, 2017 8:16 am

I'm a little confused by your explanation. The holding period is six months after purchase, but the purchase is made six months after the contribution?

new2bogle
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Re: Thoughts on my ESPP

Postby new2bogle » Fri May 19, 2017 9:36 am

I buy into my company's ESPP only because I can sell as soon as I get the stock (i.e., next business day since ESPP stocks are released after market close).

I'd be hesitant if I had to hold on to any stock for 6 months.

JV
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Re: Thoughts on my ESPP

Postby JV » Fri May 19, 2017 9:37 am

simplesimon wrote:I'm a little confused by your explanation. The holding period is six months after purchase, but the purchase is made six months after the contribution?


Sorry. So open enrollment is now. The contribution period runs from 7/1 - 12/31, meaning I fund an account via my paycheck for 6 months. On 12/31 (the end of that period) the stock purchase is made. I then have a 6-month holding period after that purchase is complete, so the earliest I could sell would be 7/1 of the following year.

NancyABQ
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Re: Thoughts on my ESPP

Postby NancyABQ » Fri May 19, 2017 9:44 am

10% discount isn't great -- 15% discount seems to be fairly common.

But the killer for me would be the requirement to hold the stock for 6 months afterwards.

I would pass.

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DaftInvestor
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Re: Thoughts on my ESPP

Postby DaftInvestor » Fri May 19, 2017 1:53 pm

To me - it would depend upon how much I believe in the company and how volatile the stock has been in the past.
With a 6 month holding period - I would certainly be less inclined to max into the plan (the way I normally would - try to get to the $25K/Year limit if company allows me to) - I wouldn't risk more than I'd be willing to lose. (In my case - I might limit my exposure to around $5K - $10K).
Regardless - I would still sell after the 6 month period (as new bets would be already ongoing in the next period).

AnalogKid22
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Re: Thoughts on my ESPP

Postby AnalogKid22 » Fri May 19, 2017 2:44 pm

Every ESPP at each company I've worked has been the same: For a 6 month period, you select a percentage of your paycheck to be put aside. At the end of the 6 month period, that money is then used to purchase as much stock as possible at a 15% discount of the lowest value of that 6 month period. In other words, if the stock goes up, you buy it, at 15% off, at whatever the starting price was for that period, not the current price. For the places I've worked, the price didn't fluctuate much, so you basically let money sit on the sideline to collect 15% and then you get taxed when you sell. Instead, that money could have been added to my index investments, earning dividends and contributing to my future retirement.

Doesn't seem worth it to me, so I do not plan to contribute to the ESPP at my new job.

rocket354
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Re: Thoughts on my ESPP

Postby rocket354 » Fri May 19, 2017 2:59 pm

AnalogKid22 wrote:Every ESPP at each company I've worked has been the same: For a 6 month period, you select a percentage of your paycheck to be put aside. At the end of the 6 month period, that money is then used to purchase as much stock as possible at a 15% discount of the lowest value of that 6 month period. In other words, if the stock goes up, you buy it, at 15% off, at whatever the starting price was for that period, not the current price. For the places I've worked, the price didn't fluctuate much, so you basically let money sit on the sideline to collect 15% and then you get taxed when you sell. Instead, that money could have been added to my index investments, earning dividends and contributing to my future retirement.

Doesn't seem worth it to me, so I do not plan to contribute to the ESPP at my new job.


You don't get a 15% gain, you get at least a 1/.85 - 1 = 17.65% gain. Over 6 months. And, in most cases, you don't contribute the entire amount up front and have to wait 6 months (which would be an approximate 35% annualized return), you contribute each paycheck over those 6 months, yet you realize the entire 17.65% gain (or more) at once, even from the contribution 2 weeks ago. If you run an IRR calcuation, it's the equivalent of about an 80% annualized return, compounded bi-weekly.

So, if you have other investment options that are better than that, please do share, because I max out my ESPP and wish I could do more.

NancyABQ
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Re: Thoughts on my ESPP

Postby NancyABQ » Fri May 19, 2017 3:03 pm

AnalogKid22 wrote:Every ESPP at each company I've worked has been the same: For a 6 month period, you select a percentage of your paycheck to be put aside. At the end of the 6 month period, that money is then used to purchase as much stock as possible at a 15% discount of the lowest value of that 6 month period. In other words, if the stock goes up, you buy it, at 15% off, at whatever the starting price was for that period, not the current price. For the places I've worked, the price didn't fluctuate much, so you basically let money sit on the sideline to collect 15% and then you get taxed when you sell. Instead, that money could have been added to my index investments, earning dividends and contributing to my future retirement.

Doesn't seem worth it to me, so I do not plan to contribute to the ESPP at my new job.


Err... (Assuming I can sell the stock right away, which is not the case with OP), why would you expect better returns from your index funds than the annualized 34% (or 82% actually) return from the ESPP plan with 15% discount?

Here's the math from another poster in a recent thread:

ras4250 wrote:
Here2LearnMore wrote:The monthly payments would be low (at least initially) allowing me to max the company match on my 401k and max my stock options which I could turn around immediately with a pretax 15% gain.


To be clear a 15% discount does not equal a 15% gain - the gains are much more than that. If you max out 15% of $90k salary, you can purchase $13,500 worth of stock (if you are paid bi-weekly that is $519.23 per pay period). If you have two "buy" periods per year you can buy $6,750 worth of stock each period. Pretend the stock is $100 per share, you buy at $85 per share, you get 79 shares, you sell at $100 per share = $7,900. Investment of $6,750 and a return of $1,150 over 6 months is 34% annualized if you consider that you "invested" all $6,750 on January 1. If you consider that you only paid in each pay period, the IRR as calculated by excel is 82% annualized!


Link to that thread:
viewtopic.php?f=1&t=219003#p3373709

For a real-world example, my company's stock went up slightly in the last 6 month period that ended last Monday. I "invested" about $11K over 6 months for a payout of ~$15K, which is now on its way to my checking account. That is for 6 months. Annualized 72% return (not considering that some of the money I got that return on had literally been invested for 0 days). If the stock price had gone down or stayed the same, I would have gotten about $13K for my $11K investment. Either way, I will take it!

Edit: Or see the same math from Rocket right above me :)

inbox788
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Re: Thoughts on my ESPP

Postby inbox788 » Fri May 19, 2017 11:07 pm

What's the market cap of the stock (i.e. is it small, medium or large cap)? From the available information, it's something I'd do. Wouldn't turn down a 10% discount on top of a lower price guarantee for the risk of the stock falling. Only reason I'd stay away is if I believed the company was heading towards bankruptcy, and if that was the case, I'd be looking for a new job as well.

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unclescrooge
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Re: Thoughts on my ESPP

Postby unclescrooge » Sat May 20, 2017 11:01 am

JV wrote:The open enrollment period has begun for my company's ESPP. To date I've been a Boglehead and avoided individual stocks, so quite honestly I blew off this opportunity for the last couple of years. But I figured I'd take a second look and ask for everyone's thoughts:

The plan takes funds for a 6-month period, and then purchases company stock based on those contributions. The minimum holding period is 6 months after purchase, and the discount is 10%. It appears (and I need to confirm this) that the purchase price is either the lower of the price on: a) the first day of the contribution period, or b) the actual date of the purchase (which would be 6 months later).

Provided all of that is accurate, what are your thoughts on this? Worth it? If I enrolled, I'd sell at 6 months.


Hard pass. For a 6 month lock in, I'd expect a 25% discount.

samsmith
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Re: Thoughts on my ESPP

Postby samsmith » Sat May 20, 2017 4:26 pm

Yes the six month holding period is a bit unusual for an ESPP and certainly adds individual stock risk.
And yes 10% is not as good as the more common 15%.
Having said that, the built in discount of 10% off the lower of the starting or ending price of the period means some periods will have even larger discounts. Plus while the stock can certainly go down over the six month period - it could also go up.

Unless the OP has real concerns for the company's future (in which case he/she might consider looking for a new job) or they could not afford the loss of the ESPP money in the rare circumstance that the stock tanks - this still seems like too good an investment opportunity to pass up. As others have posted, the discount happens twice a year, the money is invested each pay check (not all at once), and the discount potential is a minimum of 1/.9 = 11%.

I would do the ESPP (but would sell at the end of the 6 month holding period).

Helo80
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Re: Thoughts on my ESPP

Postby Helo80 » Sat May 20, 2017 4:49 pm

Bogleheads are right to be weary about ESPP.... right this second, I have about $10K in a fund from a previous employer, and I'm not sure what to do with it.

I'll share this story.... I work with a guy who worked at a company during the late-90's that was doing very well. Of course, the company had an ESPP and it had huge participation. Many employees maxed out contributions as the company's share price was growing from the 20's to 30's to 50's to 70's to the 90's and people were hoping for $150-200 per share prices and beyond...Money seemed infinite and the dot-com crash hadn't occurred!! Some people put far, far too much of their savings into their company's fund. But hey! Maybe they'd all be millionaire's like what happened at Microsoft!!

Anyways, my colleague was a participant in said ESPP, but then got cold feet about continuing to dump money into the company since you never know what the future holds. Plus, he might have needed the money at the time (for a house or car, I don't remember) and was fine with taking his profits when the stock hit $80 a share. When his former co-workers found out he was selling, they gave him much grief about how much money he would be losing in the long-run. Many thought he was crazy, but he just waved his hand, smiled at them and said he'd be fine. Basically he got so much grief that it would make any reasonable person second-guess themselves.

Sure enough.... SHTF... in a big, big way.... without spoiling the company's name by those who can ID words out of paragraphs, it was the five-letter energy company that was caught in egregious and highly illegal accounting violations.

My colleague's former colleagues lost a lot.... in some cases.... entire retirements.

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Watty
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Re: Thoughts on my ESPP

Postby Watty » Sat May 20, 2017 5:06 pm

Some people get better deals but that really don't affect your decision on if this is a good deal or not.

The key is that you get it at the lower price of the beginning or end of the period. Just by random chance you will get it at more than a 10% discount half the time. On average the money would be tied up for nine months, the six moth lock and half the six month accumulation period. If the price is flat then in the worst case you get an 11% return on the money when you sell $100 worth of stock that only cost you $90 collars.

There is no guarantee but the odds are really in your favor.

The key is to sell the stock as soon as you can so that you don't get too much in your companies stock.

JV
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Re: Thoughts on my ESPP

Postby JV » Mon May 22, 2017 7:54 am

I appreciate everyone's diverse responses. I admit to still being on the fence with this. I understand both sides, but now need to make a decision. To cover all bases I'm calling Fidelity to ensure I have the plan details exactly right. If I do this, it won't be to the max, maybe up to $5k or so.

JV
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Re: Thoughts on my ESPP

Postby JV » Mon May 22, 2017 11:42 am

Yikes. I called my ESPP provider and it turns out there is no "look back" period, meaning they don't use the lowest price at designated periods of the contribution period. The stock price is simply the price on the final day of the contribution period. So there is no chance of a further discount beyond the 10%. That stinks.


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