Asset Allocation - SARs and RSUs

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Asset Allocation - SARs and RSUs

Post by samsmith »

Wondering how others deal with SARs (stock Appreciation Rights - Options) and/or RSUs (Restricted Stock Units) when calculating Asset Allocation percentage? I have never worried about exact allocation percentage - but try to achieve generally "reasonable" percentages. I realize that with the market run up my Mega-Corp SARs and RSUs are now significant enough to arguably effect my Asset Allocation. Wondering how others deal with this? In my mind, there are four categories that could be at issue:

Vested RSUs - Vested RSUs are distributed as stock upon vesting and taxes are paid at that time. I normally sell these immediatley, but in any event, these are straightfoward and seems like they should definitely be included in AA calculations

Non-vested RSUs - You have to be employed at Mega-Corp to get these on vesting date. Count them or not?

Vested SARs - These can be exercised at employees discretion at any time. Taxes have not yet been paid, and will only be paid at exercise. Count them or not?

Non-vested SARs - These cannot be exercised unless one is employed at Mega-Corp on vesting date. Count them or not?
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Re: Asset Allocation - SARs and RSUs

Post by dbr »

A problem with this sort of thing in an asset allocation that is otherwise diversified funds of stocks and bonds is that that the risk is unique and the return hard to understand. That makes it difficult to know what role to assign to such holdings in a portfolio.

One suggestion as long as one is liquidating these things as soon as possible, or exercising options as soon as they near expiration, is to ignore the asset until realized and then treat the proceeds as income at that time. That is also technically how the IRS sees the process and is reasonable as your employer sees these assets as compensation.
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Re: Asset Allocation - SARs and RSUs

Post by bigred77 »

I liquidate all of my RSUs as they vest. I don’t really consider unvested shares until they vest. I consider it income and these do not impact my AA decisions. I also have options that don’t expire for 10 years that I just let ride (I never figured out a plan to optimize these but there all under water anyway so I guess it’s moot for me).

Now if RSUs and options made up a huge portion of your networth my answer may be different. It may even make sense to consider a hedging strategy in extreme circumstances. This is usually not applicable though unless you are an executive or in certain tech/finance jobs.
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Re: Asset Allocation - SARs and RSUs

Post by Wagnerjb »

I counted all four categories in my AA. By the time that I started getting stock options and RSU's, I had been with the company for ~20 years and it was clear that I would stay until the risk of not vesting was not great. If that risk is higher for you, then maybe you should consider not counting them until they vest.

Best wishes.
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Re: Asset Allocation - SARs and RSUs

Post by mhc »

I do not directly count my RSUs or Options in my AA. When I sell them, I diversify into my portfolio according to my AA.

I do believe that the RSUs or Options have a second order affect on my AA. I believe my AA is a little more risky because I have a large potential income sitting out there in the form of RSUs and Options.
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Re: Asset Allocation - SARs and RSUs

Post by sfnerd »

I don't generally count unvested RSUs, ISOs, NQSOs, or any other type of compensation that I might receive in the future in my asset allocation. A lot can happen until vesting: you can be terminated, a health event could force you to quit, the company could have a scandal / be acquired / etc. Most equity compensation agreements say that the employer can remove the award for a variety of reasons, and eliminate it if you are terminated or leave for any reason.

I'm financially independent though. If my unvested equity was the majority of my NW though, I might consider a more conservative allocation outside of the equity.
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