Company Stock in Asset Allocation

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jr6857
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Company Stock in Asset Allocation

Post by jr6857 »

I've been a quiet (non-posting) Boglehead for the past several years but have instituted many of the concepts suggested through the forum. One area that I've wrestled with is how to handle company stock and options as part of my asset allocation strategy. A meaningful portion of my portfolio is tied up in company stock options (majority unvested) and restricted stock (portion vests on an annual basis). I will continue to receive grants of options and restricted stock annually. Options and restricted stock vest over four years; options expire in six years. I'd be interested in how I should think about this component of my portfolio in terms of asset allocation. I'd also welcome any other comments on my portfolio.

Emergency Funds - $20K cash (excluded from below)
Debt - Mortgage $380K; no other debt
Tax Status - Married Filing Jointly
Tax Rate - 28% (AMT) + 7% State
Age - 52
Desired Allocation - Bonds (30%); Equities (65%); REIT (5%)

Current Portfolio


Vanguard IRA
Vanguard TIPS $126,400.77 15.9%
Vanguard Total Bond Fund $107,932.55 13.6%
Vanguard Small-Cap Index Fund $32,056.74 4.0%
Vanguard Total Stock Market Index Fund $50,875.18 6.4%
Vanguard Total Int'l Stock Index Fund $31,823.68 4.0%
Vanguard REIT Index Fund $38,745.39 4.9%
Subtotal $387,834.31 48.9%

Vanguard 401-K
Company Stock Fund $1,544.60 0.2%
Vanguard Target Retirement 2025 Fund $66,598.96 8.4%
SubTotal $68,143.56 8.6%
Tax Deferred Total $455,977.87 57.5%

Vanguard Taxable
Vanguard Prime Money Market Fund   $888.53 0.1%
Vanguard Total Stock Market Index Fund $179,639.62 22.6%
Subtotal $180,528.15 22.8%

Schwab
SCHW INTL EQ ETF $21,922.50 2.8%
VANGUARD TOTAL STOCK MARKET ETF $13,742.00 1.7%
Subtotal $35,664.50 4.5%

E*Trade
COLGATE PALMOLIVE CO COM $7,852.00 1.0%
VANGUARD SMALL-CAP ETF $20,000.00 2.5%
VANGUARD TOTAL STOCK MARKET ETF $75,581.00 9.5%
Subtotal $103,433.00 13.0%

I-BOND
I-BOND $16,724.00 2.1%
I-BOND $1,018.40 0.1%
Subtotal $17,742.40 2.2%
Taxable Total $337,368.05 42.5%

Total Portfolio $793,345.92 100.0%

Company Stock (current value)
Stock Options - Vested $36,020.00
Stock Options - Unvested $123,900.00
Restricted Stock - Unvested $212,580.00
Total Company Stock $ 372,500.00

Asset Allocation (x-Company Stock)
Bonds $252,803.98 31.9%
Equities $501,796.55 63.3%
REIT $38,745.39 4.9%
Total $793,345.92 100.0%

Asset Allocation (w-Company Stock)
Bonds $252,803.98 21.7%
Equities $874,296.55 75.0%
REIT $38,745.39 3.3%
Total $1,165,845.92 100.0%

Questions:
How should I think about company stock in terms of my asset allocation? Note that I do have to pay taxes on any option exercise or upon vesting of restricted stock.

At age 52, is my current asset allocation too aggressive?

Any other suggestions are welcome. Thanks in advance for your assistance :)
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CaliJim
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Post by CaliJim »

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jr6857
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Post by jr6857 »

Thanks. In this case, the vast majority of my current company stock holdings are not vested. In the case of stock options, my plan is to exercise them opportunistically in the sixth year (e.g. year of expiration) in a cashless exercise and reinvest in suitable ETF's. Restricted stock thus far has been sold immediately after vesting and will likely continue to handled in this fashion.

The issue is around how to think of unvested options and restricted stock as well as unexercised vested stock options (as per my strategy above) in term of my asset allocation strategy. I could conceivable included vested stock options (since I could realize the value immediately if desired) in my allocation while ignoring unvested options and stock.

There is no perfect answer but curious as to thoughts of others.
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mr_bunny
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Re: Company Stock in Asset Allocation

Post by mr_bunny »

jr6857 wrote:How should I think about company stock in terms of my asset allocation?
I don't consider unvested options or RSUs as part of my assets, any more than I would consider the salary I expect to earn in the coming year an asset.

But I would have a plan about what to do with them as they vest.


For me, I sell all vested RSUs ASAP. I see it this way: if the company had just paid me the same amount in cash, would I use that money to buy company stock at its current price? If your answer is the same as mine ("hell no!"), then I'd recommend you sell your RSUs as soon as they vest.

Options are more complicated, as they have an imaginary "time value" which you lose when you exercise them. On the flip side, there is an uncompensated risk to holding a single company's stock. This goes double for your own employer's stock. If your employer hits the skids, you could lose your job at the same time your options go underwater.

My plan for balancing the two was to say to myself "if my vested stock options are worth more than 10% of my portfolio, I will exercise them until they're no more than 5%". I then take the proceeds and distribute them per my AA plan.

For me, having this plan is quite a relief: I can let some of the money "ride", but only enough that I'd be OK if I lost it all overnight. I also have a very clear plan about when to exercise my options, so I find that I can relax and not obsess about what's happening with my company's stock price.


I hope this helps you figure out something that will work for you.
- Chris
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jr6857
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Post by jr6857 »

Thanks! I agree with your view on RSU's and have also sold upon vesting. I understand why you do not include them in your asset allocation similar to future salary. That is the conservative view that I've taken as well.

I've decided to let my options ride and try to take maximum advantage of the time value component of the option. As you point out, this strategy is not without risk. I appreciate your input very much.
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CaliJim
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Watty
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Post by Watty »

Counting your unvested stock is literarily "counting the chickens before the eggs hatch". I would leave it out of the asset allocation numbers especially since it sounds like you will not be keeping the stock once it vests.

<I>....At age 52, is my current asset allocation too aggressive?
.....</I>

It is not exact, but in a lot of ways a mortgage is essentially a negative bond so from that perspective your asset allocation is something like negative 10% bonds and 110% stocks.

It might not make a lot of sense to own a lot of bonds that have a lower interest rate than your mortgage. Can you make a compelling argument for doing this? About a third of houses are owned without a mortage and many people find that it makes sense to have a paid off house when they retire. It could be time to pay it off.

One thing to look at is what your financial goals are and if you actually need to take a lot of risk to reach your goal. If you are on track to meet you goals with a more conservative portfolio, then be careful about being more aggressive than you need to be.


My gut feel is that yes your are probably too aggressive.


Greg
dbr
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Post by dbr »

Deferred compensation is future income, at risk income at that, and is not an asset. Leave it out of your asset computations.

If you want to account for it in financial planning put it in future cash flow.
grberry
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Post by grberry »

I generally agree on selling the stock received from RSU vesting. However, you probably will incur commission costs from the sales transaction. Minimizing investment expenses is also a boglehead thing to do. What I've been doing is waiting until enough shares accumulate that the selling commission will be less than 1% of the facial sale amount. Since I get low numbers of shares each vest date, this can mean waiting a year or morebetween sales events, even though I currently have three vest dates each quarter.

I don't count unvested items or vested but unexercised options in my asset allocation. The unexercised options rule I use is definitely debatable, as you could exercise them if the window were open. If you do decide to include them in your asset allocation, consider including only the after tax gain in the allocation.
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jr6857
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Post by jr6857 »

Thank you for the feedback. When my RSU's vest, it is in sufficient quantities that the transaction costs are immaterial. The Plan is structured through Schwab and typical cost of a stock sale is only $10. Depending on the particular lot, it is only 0.07% or less of the value.

I do appreciate everyone's input. Upon reflect as to the aggressiveness of the equity component in the asset allocation at my current age, I do tend to agree with the observation that it is too aggressive. I have plenty of space in my tax deferred space to redistribute to a more conservative allocation.

Not sure I'm ready to go down the path of paying off the mortgage. I do understand the point. Thanks again.
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Post by Valuethinker »

jr6857 wrote:Thank you for the feedback. When my RSU's vest, it is in sufficient quantities that the transaction costs are immaterial. The Plan is structured through Schwab and typical cost of a stock sale is only $10. Depending on the particular lot, it is only 0.07% or less of the value.

I do appreciate everyone's input. Upon reflect as to the aggressiveness of the equity component in the asset allocation at my current age, I do tend to agree with the observation that it is too aggressive. I have plenty of space in my tax deferred space to redistribute to a more conservative allocation.

Not sure I'm ready to go down the path of paying off the mortgage. I do understand the point. Thanks again.
When the stock options vest, I would exercise, if in the money, and sell. Reinvest according to my asset allocation and/or pay down debt.

Stock options have only theoretical value until you do that.

Put it another way, when the stock option vests, ask yourself the question 'would I buy more stock, now, at the current market price?'

Because if you would not yet you elect to hold on, then you are walking away from cash (the difference between the current option price and the current share price), and taking a bet that the share price will go up even more from here. ie you are, de facto, investing part of your employment compensation in more company stock.

When you don't sell a vested stock option, you are making a new bet on the company stock price, buying in at the existing market price.

Unvested stock options just don't count-- they are deferred future compensation.
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