Is ESPP as Risky as Stock Picking ?

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confusedinvestor
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Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Tue Apr 07, 2020 5:39 pm

Experienced BHs,

Strategy: If you invest in ESPP (10% of your salary via payroll deductions for 6 months) for your company stock and will immediately sell all purchased shares on next day of that 6 month period with offered price of 15% discount on the lower of the start or end date.

Note: I don't want to hold on the espp shares, even if it drops > 15% after shares are deposited or I've insider information, that stock may shoot up 150% by 1 year.

1. What are the risks of the above strategy, given it is a individual stock ?

2. Is it worth taking such risks with individual stocks with such strategy even with such 15% premium discount ? Anyone doing this ?

3. Given it is a payroll deduction, are you not missing out on DCA for 6months vs lumpsum investment on espp proceeds to Total-Stock-Market ?

4. Am I "violating" any time-tested BH philosophy with my above strategy ?


My company stock is very volatile, it is a small diabetic pump manufacturing company, small-cap, with ticker - TNDM.

I'd appreciate some inputs on this before I sign up with this strategy. Thanks! :beer
Last edited by confusedinvestor on Tue Apr 07, 2020 6:52 pm, edited 1 time in total.

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Tue Apr 07, 2020 5:44 pm

I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

milktoast
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Re: Is ESPP as Risky as Stock Picking ?

Post by milktoast » Tue Apr 07, 2020 5:46 pm

No. It's much less risky. I'm assuming you get a 15% discount on the lower of the start or end of the offering period.

Next day sale only risk is overnight change in market price. If it drops more than 15% overnight, you can lose money.

But frankly that's not much of a risk compared to the upside. Especially in a rising market, where you could be buying stock with significantly more than a 15% discount.

With next day sale, ESPP is just a cash bonus. Take the money and run.

If your ESPP doesn't allow next day sale or could have a purchase price that isn't always discounted to the last day of the offering period, then there are considerations. But for an ESPP like yours, the BH philosophy is max it out.

BTW. You should be able to max it out without reducing other savings. You just need enough funds to buy stock for six months, then you get it all back plus 15%. So once you have funded the first six month period, you actually end up with more money to put into savings rather than less.

alex_686
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Re: Is ESPP as Risky as Stock Picking ?

Post by alex_686 » Tue Apr 07, 2020 5:50 pm

milktoast wrote:
Tue Apr 07, 2020 5:46 pm
No. It's much less risky. I'm assuming you get a 15% discount on the lower of the start or end of the offering period.
To be the devil's advocate, what is the volatility of your stock? Sometimes the volatility is so high that it is not a slam dunk. My gut is telling me it would have to be north of 20%, 25% where one would have to start to ask different, harder, question.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

dbr
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Re: Is ESPP as Risky as Stock Picking ?

Post by dbr » Tue Apr 07, 2020 5:51 pm

It is a small risk to take the effective small increase in compensation. My company used to offer a plan where they granted the stock the last day of each month and you could sell it the next day. Simple small pay increase. Then they imposed a one year holding period so I bailed out. But rationally it was actually still good. I don't see this rising to the level of philosophy. It is just a minor transaction in the overall flow of things.

milktoast
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Re: Is ESPP as Risky as Stock Picking ?

Post by milktoast » Tue Apr 07, 2020 6:22 pm

alex_686 wrote:
Tue Apr 07, 2020 5:50 pm
To be the devil's advocate, what is the volatility of your stock? Sometimes the volatility is so high that it is not a slam dunk. My gut is telling me it would have to be north of 20%, 25% where one would have to start to ask different, harder, question.
I've had this type of ESPP at incredibly volatile company, never lost money.

Typically they try to put ESPP after quarterly numbers in a period of time that should be lower volatility. Not as a favor to employees, but rather to avoid insider trading issues.

One time I had money refunded because the stock dropped by 75% within the six month period, which put the purchase above IRS limits. But still came out ahead on overnight trade. Another time, it lost 7% overnight, but still came out ahead on overnight trade.

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Re: Is ESPP as Risky as Stock Picking ?

Post by Dottie57 » Tue Apr 07, 2020 6:33 pm

First time I purchased shares through ESPP The CEO got into trouble and share price lost a lot. I was buying and holding never again.

Second time around I used ESPP to pay my mortgage off early as I immediately sold shares after purchase.

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confusedinvestor
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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Tue Apr 07, 2020 6:50 pm

milktoast wrote:
Tue Apr 07, 2020 5:46 pm
No. It's much less risky. I'm assuming you get a 15% discount on the lower of the start or end of the offering period.
Yep, it is a 15% discount on the lower of the start or end date.
milktoast wrote:
Tue Apr 07, 2020 5:46 pm

With next day sale, ESPP is just a cash bonus. Take the money and run.
Yep, that's the plan,

I've to revise my IPS to stick to this plan and maybe put calendar reminder to sell all asap the share the deposited. and immediately, move $ from the espp account to Fidelity to buy ITOT Total US Market shares asap.

Thanks for your response.

I am allowed 15% max of my salary, but I am going to do 10% this time just to ensure the logistics works.

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confusedinvestor
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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Tue Apr 07, 2020 6:53 pm

alex_686 wrote:
Tue Apr 07, 2020 5:50 pm
milktoast wrote:
Tue Apr 07, 2020 5:46 pm
No. It's much less risky. I'm assuming you get a 15% discount on the lower of the start or end of the offering period.
To be the devil's advocate, what is the volatility of your stock? Sometimes the volatility is so high that it is not a slam dunk. My gut is telling me it would have to be north of 20%, 25% where one would have to start to ask different, harder, question.
Yes, the stock is very volatile, the 52 week range is $43 to $91.
Ticker - TNDM.

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Re: Is ESPP as Risky as Stock Picking ?

Post by HawkeyePierce » Tue Apr 07, 2020 7:00 pm

I work for a very volatile large cap company. 4x the volatility of the S&P500 (which we're in) since the company IPO. I take the 15% discount and sell all my shares immediately.

I suppose the biggest risk is that the company somehow goes belly-up before executing the purchase and the money I've put into the ESPP goes up in smoke. Ours only purchases shares twice a year. I'm personally not that worried about it.

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Re: Is ESPP as Risky as Stock Picking ?

Post by Rosencrantz1 » Tue Apr 07, 2020 7:12 pm

confusedinvestor wrote:
Tue Apr 07, 2020 6:50 pm
milktoast wrote:
Tue Apr 07, 2020 5:46 pm
No. It's much less risky. I'm assuming you get a 15% discount on the lower of the start or end of the offering period.
Yep, it is a 15% discount on the lower of the start or end date.
milktoast wrote:
Tue Apr 07, 2020 5:46 pm

With next day sale, ESPP is just a cash bonus. Take the money and run.
Yep, that's the plan,

I've to revise my IPS to stick to this plan and maybe put calendar reminder to sell all asap the share the deposited. and immediately, move $ from the espp account to Fidelity to buy ITOT Total US Market shares asap.

Thanks for your response.

I am allowed 15% max of my salary, but I am going to do 10% this time just to ensure the logistics works.
+1 When I was employed at an earlier company, I had an ESPP that offered a 15% discount too - and, discounted 15% on the lower of start/end date. I bought the maximum I could every year and typically sold right away (but, I didn't always). It was 'easy' money.

In your shoes, I'd absolutely do it - great fringe benefit.

Dominic
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Re: Is ESPP as Risky as Stock Picking ?

Post by Dominic » Tue Apr 07, 2020 7:16 pm

With a short holding period, no.

If the holding period is longer, it's risky. Not sure if it's more risky than stock picking (after all, it's discounted), but it adds a new dimension of risk that doesn't exist under normal stock picking circumstances: the stock's risk is tied to your career risk.

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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Tue Apr 07, 2020 7:20 pm

Dominic wrote:
Tue Apr 07, 2020 7:16 pm
With a short holding period, no.

If the holding period is longer, it's risky. Not sure if it's more risky than stock picking (after all, it's discounted), but it adds a new dimension of risk that doesn't exist under normal stock picking circumstances: the stock's risk is tied to your career risk.
In my case, the ESPP stock I buy is already in the Top 10 of US TSM.

Concentrated risk? Yes, in theory.

But it's not much more concentrated than what I'm already buying via indexes, anyway.

It's all proportional.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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confusedinvestor
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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Tue Apr 07, 2020 7:29 pm

Rosencrantz1 wrote:
Tue Apr 07, 2020 7:12 pm

+1 When I was employed at an earlier company, I had an ESPP that offered a 15% discount too - and, discounted 15% on the lower of start/end date. I bought the maximum I could every year and typically sold right away (but, I didn't always). It was 'easy' money.

In your shoes, I'd absolutely do it - great fringe benefit.
Thanks for your feedback! It helps.

FYI - This company is small and stock is very volatile and on top of that, the company doesnt offer any 401K match and the 401K plan is horrible where I've to pay 35 bps for an external plan advisor who advises the company on the plan. My last company had 7K match but I'm glad I still have a job today.

So, I will take my ESPP benefits but it just don't sit well, given it is still an individual stock.

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Re: Is ESPP as Risky as Stock Picking ?

Post by Rosencrantz1 » Tue Apr 07, 2020 7:42 pm

confusedinvestor wrote:
Tue Apr 07, 2020 7:29 pm
Rosencrantz1 wrote:
Tue Apr 07, 2020 7:12 pm

+1 When I was employed at an earlier company, I had an ESPP that offered a 15% discount too - and, discounted 15% on the lower of start/end date. I bought the maximum I could every year and typically sold right away (but, I didn't always). It was 'easy' money.

In your shoes, I'd absolutely do it - great fringe benefit.
Thanks for your feedback! It helps.

FYI - This company is small and stock is very volatile and on top of that, the company doesnt offer any 401K match and the 401K plan is horrible where I've to pay 35 bps for an external plan advisor who advises the company on the plan. My last company had 7K match but I'm glad I still have a job today.

So, I will take my ESPP benefits but it just don't sit well, given it is still an individual stock.
Yes, the fact that your company stock is so volatile certainly adds an additional risk element. Nonetheless, I'd still jump in with both feet - especially if you are NOT required to hold the discounted stock for some specified holding period (doesn't sound like you are).

In my case (20+ years ago), the company stock wasn't nearly as volatile - it basically chugged along generally headed higher. I often made 20%+ on it (including the 15% discount) by the time I sold it.

Dominic
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Re: Is ESPP as Risky as Stock Picking ?

Post by Dominic » Tue Apr 07, 2020 8:56 pm

watchnerd wrote:
Tue Apr 07, 2020 7:20 pm
Dominic wrote:
Tue Apr 07, 2020 7:16 pm
With a short holding period, no.

If the holding period is longer, it's risky. Not sure if it's more risky than stock picking (after all, it's discounted), but it adds a new dimension of risk that doesn't exist under normal stock picking circumstances: the stock's risk is tied to your career risk.
In my case, the ESPP stock I buy is already in the Top 10 of US TSM.

Concentrated risk? Yes, in theory.

But it's not much more concentrated than what I'm already buying via indexes, anyway.

It's all proportional.
I think the mega-cap companies are an exception. They're too dominant to be that much riskier than the market as a whole.

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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Tue Apr 07, 2020 9:15 pm

Dominic wrote:
Tue Apr 07, 2020 8:56 pm


I think the mega-cap companies are an exception. They're too dominant to be that much riskier than the market as a whole.
That's my thinking, as well.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by ARoseByAnyOtherName » Tue Apr 07, 2020 9:21 pm

watchnerd wrote:
Tue Apr 07, 2020 5:44 pm
I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
There is no risk if you sell immediately when it vests.

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Re: Is ESPP as Risky as Stock Picking ?

Post by ARoseByAnyOtherName » Tue Apr 07, 2020 9:23 pm

confusedinvestor wrote:
Tue Apr 07, 2020 7:29 pm
Rosencrantz1 wrote:
Tue Apr 07, 2020 7:12 pm

+1 When I was employed at an earlier company, I had an ESPP that offered a 15% discount too - and, discounted 15% on the lower of start/end date. I bought the maximum I could every year and typically sold right away (but, I didn't always). It was 'easy' money.

In your shoes, I'd absolutely do it - great fringe benefit.
Thanks for your feedback! It helps.

FYI - This company is small and stock is very volatile and on top of that, the company doesnt offer any 401K match and the 401K plan is horrible where I've to pay 35 bps for an external plan advisor who advises the company on the plan. My last company had 7K match but I'm glad I still have a job today.

So, I will take my ESPP benefits but it just don't sit well, given it is still an individual stock.
What does “very volatile” mean? Define that as specifically as you can.

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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Tue Apr 07, 2020 9:24 pm

ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:21 pm
watchnerd wrote:
Tue Apr 07, 2020 5:44 pm
I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
There is no risk if you sell immediately when it vests.
I don't.

Because if I sold, I would just dump it into a market index right away, anyway.

And given the stock is a major component of the indexes, I might as well just hang on for the best tax treatment.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by HawkeyePierce » Tue Apr 07, 2020 9:31 pm

ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:23 pm
confusedinvestor wrote:
Tue Apr 07, 2020 7:29 pm
Rosencrantz1 wrote:
Tue Apr 07, 2020 7:12 pm

+1 When I was employed at an earlier company, I had an ESPP that offered a 15% discount too - and, discounted 15% on the lower of start/end date. I bought the maximum I could every year and typically sold right away (but, I didn't always). It was 'easy' money.

In your shoes, I'd absolutely do it - great fringe benefit.
Thanks for your feedback! It helps.

FYI - This company is small and stock is very volatile and on top of that, the company doesnt offer any 401K match and the 401K plan is horrible where I've to pay 35 bps for an external plan advisor who advises the company on the plan. My last company had 7K match but I'm glad I still have a job today.

So, I will take my ESPP benefits but it just don't sit well, given it is still an individual stock.
What does “very volatile” mean? Define that as specifically as you can.
Their stddev is 99%. Pretty volatile.

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Re: Is ESPP as Risky as Stock Picking ?

Post by MathIsMyWayr » Tue Apr 07, 2020 9:58 pm

It is only 10% of your salary of 6 mon. There is also a cap on the amount based on the offering price, $25k(?). Not worth sweating over the risk. A discount of 15% is a good deal.

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confusedinvestor
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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Tue Apr 07, 2020 10:33 pm

Thanks.

I thought the risk is not being in the market for 6 months while those payroll contributions are held vs DCA on Total Stock Market when I get paid.
MathIsMyWayr wrote:
Tue Apr 07, 2020 9:58 pm
It is only 10% of your salary of 6 mon. There is also a cap on the amount based on the offering price, $25k(?). Not worth sweating over the risk. A discount of 15% is a good deal.

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Re: Is ESPP as Risky as Stock Picking ?

Post by MathIsMyWayr » Wed Apr 08, 2020 2:20 am

confusedinvestor wrote:
Tue Apr 07, 2020 10:33 pm
Thanks.

I thought the risk is not being in the market for 6 months while those payroll contributions are held vs DCA on Total Stock Market when I get paid.
MathIsMyWayr wrote:
Tue Apr 07, 2020 9:58 pm
It is only 10% of your salary of 6 mon. There is also a cap on the amount based on the offering price, $25k(?). Not worth sweating over the risk. A discount of 15% is a good deal.
You contribute to ESPP with every pay check for 6 months and get a discount of 15% for the purchase of the company shares at the end of the period. The average duration of investment is about 3 months. The effective annual return is close to 70%. ESPP is an excellent investment tool, but there is a definite risk of investing for your employer. I guess this is why there is an IRS annual limit of $25k purchase.

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Re: Is ESPP as Risky as Stock Picking ?

Post by ryman554 » Wed Apr 08, 2020 9:02 am

confusedinvestor wrote:
Tue Apr 07, 2020 7:29 pm

So, I will take my ESPP benefits but it just don't sit well, given it is still an individual stock.
It's not an individual stock. (other than for a couple of hours) It's much more like a supercharged EE bond.

You put aside money (with no interest) for 6 months. At the end of six months, they give out a coupon which allows you buy stock at a (at least) 15% discount. Which you then sell same day (or is it next day? Doesn't much matter).

If you want out, you get out and get your $$ back. There is literally zero risk except between the ESPP buy and your immediate, usually automatic, sale. If you always sell, you get a guaranteed >15% return on your initial money (minus fees, minus those damn frontrunners who seem to always know when the sale date is so you lose ~1% on the transaction) for a mind-blowing 60%+ yearly rate of return. Completely independent on the downside (not upside!) of your stock price.

Again, this is *guaranteed*. Very much unlike any single stock or, for that matter, like any savings account or CD out there.

The best part is that it's self-funding, with a little bit of budgeting, so after the first 6-month window, the previous window contributions pays for the following. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.

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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Wed Apr 08, 2020 5:43 pm

Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.

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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Wed Apr 08, 2020 5:50 pm

confusedinvestor wrote:
Wed Apr 08, 2020 5:43 pm
Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.
They're assuming you sell ASAP.

(I don't sell ASAP, and my gains have been ~80% on average for shares I've held for 2 years)
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by dcabler » Wed Apr 08, 2020 5:55 pm

confusedinvestor wrote:
Tue Apr 07, 2020 5:39 pm
Experienced BHs,

Strategy: If you invest in ESPP (10% of your salary via payroll deductions for 6 months) for your company stock and will immediately sell all purchased shares on next day of that 6 month period with offered price of 15% discount on the lower of the start or end date.

Note: I don't want to hold on the espp shares, even if it drops > 15% after shares are deposited or I've insider information, that stock may shoot up 150% by 1 year.

1. What are the risks of the above strategy, given it is a individual stock ?

2. Is it worth taking such risks with individual stocks with such strategy even with such 15% premium discount ? Anyone doing this ?

3. Given it is a payroll deduction, are you not missing out on DCA for 6months vs lumpsum investment on espp proceeds to Total-Stock-Market ?

4. Am I "violating" any time-tested BH philosophy with my above strategy ?


My company stock is very volatile, it is a small diabetic pump manufacturing company, small-cap, with ticker - TNDM.

I'd appreciate some inputs on this before I sign up with this strategy. Thanks! :beer
Put me in the "Sell immediately as soon as it hits my account" category. My current ESPP program gives me a 15% discount at either the beginning of the quarter or end of the quarter, using whichever had the lower price. Reasons: I get my paycheck from my employer. Why do I need any more risk from them than that? Second, it's free money, why turn that down? I dutifully take the proceeds and deposit them into my taxable investment account and wait for the next quarter. I withhold the max amount allowed for this.

Only danger is downward price movement from the time between closing price on the last day of the quarter until it shows up in my account. For some companies where I've worked, it was available to trade by opening bell the next day. At my current company it can take up to 4 or 5 days to appear. Normally not a huge issue but with the current volatility, you can get a little nervous. This quarter pretty much all I got was the 15% discount. Took it and ran.

Best one I ever had did the same thing, but over a 6 month period, but with a twist. In the following quarter, if the stock price, post 15% discount was higher than the previous 6 months, then the price you got for the previous 6 month window applied. No limit to the number of consecutive quarters, so if your stock was on a roll, it was pretty sweet.

I do likewise with RSU's, by the way.

Cheers.
Last edited by dcabler on Wed Apr 08, 2020 6:00 pm, edited 1 time in total.

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Re: Is ESPP as Risky as Stock Picking ?

Post by MathIsMyWayr » Wed Apr 08, 2020 6:00 pm

confusedinvestor wrote:
Wed Apr 08, 2020 5:43 pm
Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.
IRS limit: the purchase of max. $25k before discount per year.
Gain may be much more than $3k.

ryman554
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Re: Is ESPP as Risky as Stock Picking ?

Post by ryman554 » Thu Apr 09, 2020 8:27 am

confusedinvestor wrote:
Wed Apr 08, 2020 5:43 pm
Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.
Contribution limit* of $25k a year. That limits your upside.

(I believe the limit is more subtle than this, but it's good to 0 order)

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Re: Is ESPP as Risky as Stock Picking ?

Post by ryman554 » Thu Apr 09, 2020 8:33 am

watchnerd wrote:
Wed Apr 08, 2020 5:50 pm
confusedinvestor wrote:
Wed Apr 08, 2020 5:43 pm
Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.
They're assuming you sell ASAP.

(I don't sell ASAP, and my gains have been ~80% on average for shares I've held for 2 years)
I'm glad you enjoy the fruits of your single stock risk that also happens to be correlated to your place of work. Please realize just how much risk you are taking with that money.

If you're not selling ASAP, I can only assume that you are heavily investing in your company's stock outside of the ESPP plan, too. Are you? If not, why? If ESPP shares are good to hold for the long term, then it's clearly a better investment than average without the discount, too. (given your extra 65% ROI)

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Re: Is ESPP as Risky as Stock Picking ?

Post by ryman554 » Thu Apr 09, 2020 8:36 am

MathIsMyWayr wrote:
Wed Apr 08, 2020 6:00 pm
confusedinvestor wrote:
Wed Apr 08, 2020 5:43 pm
Why is it limited to $3k profit per year ? Is it a IRS profit limit ?
ryman554 wrote:
Wed Apr 08, 2020 9:02 am
. A perpetual 60% return. Please back up the truck, too bad it's limited to ~$3k of profit per year, there is nothing else like it out there.
IRS limit: the purchase of max. $25k before discount per year.
Gain may be much more than $3k.
This is true, it can be, but it's *guaranteed* to be about $3k/year, with only upside. 6 months growth of >50%, however, are quite rare.

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Thu Apr 09, 2020 8:42 am

ryman554 wrote:
Thu Apr 09, 2020 8:33 am


I'm glad you enjoy the fruits of your single stock risk that also happens to be correlated to your place of work. Please realize just how much risk you are taking with that money.

If you're not selling ASAP, I can only assume that you are heavily investing in your company's stock outside of the ESPP plan, too. Are you? If not, why? If ESPP shares are good to hold for the long term, then it's clearly a better investment than average without the discount, too. (given your extra 65% ROI)
1) 40% of my compensation is in RSUs, which are cashed on vesting. So in that sense, I'm vested in the company's stock performance as a portion of earnings.

2) The company I work for is in the top 10 of US TSM, so in that sense, yes, I am investing outside the ESPP, via the usual indexes.

3) I invest in global market weights, which tilts away from US, de-risking things.

4) ESPP holdings are <5% of my liquid portfolio, <2.5% of net worth. The risk is concentrated, but small.

So "how much risk" I'm taking is negligible.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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vineviz
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Re: Is ESPP as Risky as Stock Picking ?

Post by vineviz » Thu Apr 09, 2020 8:53 am

watchnerd wrote:
Tue Apr 07, 2020 9:15 pm
Dominic wrote:
Tue Apr 07, 2020 8:56 pm


I think the mega-cap companies are an exception. They're too dominant to be that much riskier than the market as a whole.
That's my thinking, as well.
Lots of GE employees probably thought that, too. Likewise PG&E employees, Enron employees, GM employees, etc.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Thu Apr 09, 2020 8:55 am

vineviz wrote:
Thu Apr 09, 2020 8:53 am
watchnerd wrote:
Tue Apr 07, 2020 9:15 pm
Dominic wrote:
Tue Apr 07, 2020 8:56 pm


I think the mega-cap companies are an exception. They're too dominant to be that much riskier than the market as a whole.
That's my thinking, as well.
Lots of GE employees probably thought that, too. Likewise PG&E employees, Enron employees, GM employees, etc.
Even if I'm wrong, it's not big money.

It's only $25k/year.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by ryman554 » Thu Apr 09, 2020 9:06 am

watchnerd wrote:
Thu Apr 09, 2020 8:42 am
1) 40% of my compensation is in RSUs, which are cashed on vesting. So in that sense, I'm vested in the company's stock performance as a portion of earnings.

4) ESPP holdings are <5% of my liquid portfolio, <2.5% of net worth. The risk is concentrated, but small.

So "how much risk" I'm taking is negligible.
How do you internally justify selling all RSU immediately and keeping all(?) ESPP shares? They are the same thing (with different tax treatments, I suppose, but not enough to really matter in the long run). Why treat them differently in your portfolio, and particularly to highlight the "benefit" (really, luck) to others of not selling one vs. always selling the other, when the benefit (ESPP 15% discount rate) is realized at day 1, and the rest is purely a single stock gamble that you can do (but really is anti-Boglehead) at any time?

A stock is a stock is a stock. I know you'll say it's small and play money so who cares, and you're probably right about that. But any argument you can make to hold ESPP shares can be used to hold RSU, and purchase extra company stock in taxable too. Since you don't do the latter, isn't it kind of cognitive dissonance to do the former, regardless of risk?

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Thu Apr 09, 2020 9:10 am

ryman554 wrote:
Thu Apr 09, 2020 9:06 am
watchnerd wrote:
Thu Apr 09, 2020 8:42 am
1) 40% of my compensation is in RSUs, which are cashed on vesting. So in that sense, I'm vested in the company's stock performance as a portion of earnings.

4) ESPP holdings are <5% of my liquid portfolio, <2.5% of net worth. The risk is concentrated, but small.

So "how much risk" I'm taking is negligible.
How do you internally justify selling all RSU immediately and keeping all(?) ESPP shares? They are the same thing (with different tax treatments, I suppose, but not enough to really matter in the long run). Why treat them differently in your portfolio, and particularly to highlight the "benefit" (really, luck) to others of not selling one vs. always selling the other, when the benefit (ESPP 15% discount rate) is realized at day 1, and the rest is purely a single stock gamble that you can do (but really is anti-Boglehead) at any time?

A stock is a stock is a stock. I know you'll say it's small and play money so who cares, and you're probably right about that. But any argument you can make to hold ESPP shares can be used to hold RSU, and purchase extra company stock in taxable too. Since you don't do the latter, isn't it kind of cognitive dissonance to do the former, regardless of risk?
Because of the tax treatment.

RSUs don't get preferential tax treatment. I have to pay the taxes on them as soon as they're vested, just like other income.

If I hold ESPP shares for 2 years, long enough to get both long term cap gains and change the disposition qualification, the tax treatment is significantly better.

Also, if I didn't cash out the RSUs, the portion of concentrated net worth would end up becoming meaningful as opposed to trivial.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by 17outs » Fri Apr 10, 2020 10:13 am

I participate in ESPP and max it out. I also get RSUs and I own ISOs. Because I own ISOs which are a huge amount of risk I choose to ESPP quicksale and RSU sell immediately. It's too easy to pay taxes on vest and then lose out because stock is down 2 years later. I am trying to divest my ISOs but at current times I just can't do it. I actually held my ESPP and RSU from the March buy since they were so exhausted.

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Re: Is ESPP as Risky as Stock Picking ?

Post by The Broz » Fri Apr 10, 2020 10:30 am

I have had two jobs with ESPP plans. One of them I just kept the stock for several years and sold about 2/3rds last year on the thought that we would need the cash for a house purchase. The stock did very, very well. The second job was pretty much the opposite experience, but I sold the stock in the same tax year as the first so I got a bit of a break on the capital gains.
But to answer your question, unless the stock is REALLY volatile, I think you should be ok to be in the plan and sell the stock immediately upon purchase (assuming you are allowed). Unless you have really bad luck, it will be the easiest money you make. But if you want to hold on to the stock, there is quite a bit of risk there. That is not necessarily a bad thing, depending on your situation. If the stock went to zero and it really wouldn't have an impact on your net worth in a significant way, then I would say to let it ride. But if you don't like risk or you can't afford too much risk, just sell it.

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Re: Is ESPP as Risky as Stock Picking ?

Post by 17outs » Fri Apr 10, 2020 10:56 am

Even a ESPP quicksale will likely sell lower than the price paid before the discount. Quicksales always happen a day or so later but it would have to drop 15% to break even so pretty safe.

ridebikeseveryday
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Re: Is ESPP as Risky as Stock Picking ?

Post by ridebikeseveryday » Fri Apr 10, 2020 11:09 am

watchnerd wrote:
Tue Apr 07, 2020 9:24 pm
ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:21 pm
watchnerd wrote:
Tue Apr 07, 2020 5:44 pm
I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
There is no risk if you sell immediately when it vests.
I don't.

Because if I sold, I would just dump it into a market index right away, anyway.

And given the stock is a major component of the indexes, I might as well just hang on for the best tax treatment.
Seems like you're letting the tax tail wag the risk dog. Even at #1, MSFT is only 4.2% of VTSAX: https://investor.vanguard.com/mutual-fu ... d-holdings

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Fri Apr 10, 2020 11:13 am

ridebikeseveryday wrote:
Fri Apr 10, 2020 11:09 am
watchnerd wrote:
Tue Apr 07, 2020 9:24 pm
ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:21 pm
watchnerd wrote:
Tue Apr 07, 2020 5:44 pm
I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
There is no risk if you sell immediately when it vests.
I don't.

Because if I sold, I would just dump it into a market index right away, anyway.

And given the stock is a major component of the indexes, I might as well just hang on for the best tax treatment.
Seems like you're letting the tax tail wag the risk dog. Even at #1, MSFT is only 4.2% of VTSAX: https://investor.vanguard.com/mutual-fu ... d-holdings

Sure, but the risk dog is tiny compared to the rest of the portfolio.

I don't mind gambling a bit on $25k.

It's a rounding error in the larger asset allocation.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

ridebikeseveryday
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Re: Is ESPP as Risky as Stock Picking ?

Post by ridebikeseveryday » Fri Apr 10, 2020 11:17 am

watchnerd wrote:
Fri Apr 10, 2020 11:13 am
ridebikeseveryday wrote:
Fri Apr 10, 2020 11:09 am
watchnerd wrote:
Tue Apr 07, 2020 9:24 pm
ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:21 pm
watchnerd wrote:
Tue Apr 07, 2020 5:44 pm
I invest to the max in my ESPP (10% discount, purchases every 3 months).

Yes, it's concentrated risk.

No, I don't mind as long as it doesn't exceed too much of my net worth.

Some people sell ASAP to bag the easy 10%.

I hold for 2 years to get the best disposition.
There is no risk if you sell immediately when it vests.
I don't.

Because if I sold, I would just dump it into a market index right away, anyway.

And given the stock is a major component of the indexes, I might as well just hang on for the best tax treatment.
Seems like you're letting the tax tail wag the risk dog. Even at #1, MSFT is only 4.2% of VTSAX: https://investor.vanguard.com/mutual-fu ... d-holdings

Sure, but the risk dog is tiny compared to the rest of the portfolio.

I don't mind gambling a bit on $25k.

It's a rounding error in the larger asset allocation.
Ok, so call it gambling. I think saying things like "I might as well just..." is overly dismissive of the correlated risk you're taking with your job. There's nothing wrong with it, and it's a small amount of money. But call it what it is.

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Re: Is ESPP as Risky as Stock Picking ?

Post by DaftInvestor » Fri Apr 10, 2020 11:20 am

confusedinvestor,
In my mind, ESPP plans, such as yours - is the best risk/reward place to put your money.
First - risk is minimal. Typically you are at risk for only the day the stocks are bought with your money. Sell the next day. Don't think of it as buying/investing in the stock - think of it as additional income. Don't hold the stock at all.
Second - your gain is awesome - more than most realize since they don't do the math. A 15% discount represents a 100/85 = 17.65% return for the 6 months. Annualized you are making 35% (Since you can re-use the same money a second time in the year). In fact - its even better - you are DCA'ing over 6 months so your entire investment isn't out of your pocket for the entire 6 months - on average its out of your pocket 3 months making this a 70% return (assuming the stock value stays the same - in your case - it could be greater since you get the lower price). But even if you don't buy into the 70% return - why give up a practically guaranteed 35% return (with very minimal risk).
This is practically extra money in the bank for you - you should MAX out this plan.
Last edited by DaftInvestor on Fri Apr 10, 2020 11:36 am, edited 1 time in total.

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watchnerd
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Re: Is ESPP as Risky as Stock Picking ?

Post by watchnerd » Fri Apr 10, 2020 11:27 am

ridebikeseveryday wrote:
Fri Apr 10, 2020 11:17 am
watchnerd wrote:
Fri Apr 10, 2020 11:13 am
ridebikeseveryday wrote:
Fri Apr 10, 2020 11:09 am
watchnerd wrote:
Tue Apr 07, 2020 9:24 pm
ARoseByAnyOtherName wrote:
Tue Apr 07, 2020 9:21 pm


There is no risk if you sell immediately when it vests.
I don't.

Because if I sold, I would just dump it into a market index right away, anyway.

And given the stock is a major component of the indexes, I might as well just hang on for the best tax treatment.
Seems like you're letting the tax tail wag the risk dog. Even at #1, MSFT is only 4.2% of VTSAX: https://investor.vanguard.com/mutual-fu ... d-holdings

Sure, but the risk dog is tiny compared to the rest of the portfolio.

I don't mind gambling a bit on $25k.

It's a rounding error in the larger asset allocation.
Ok, so call it gambling. I think saying things like "I might as well just..." is overly dismissive of the correlated risk you're taking with your job. There's nothing wrong with it, and it's a small amount of money. But call it what it is.
Hmmm...I already said:

"Yes, it's concentrated risk"

"No, I don't mind as long as it doesn't exceed too much of my net worth."

I think I've been pretty clear on that.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Is ESPP as Risky as Stock Picking ?

Post by rbaldini » Fri Apr 10, 2020 11:34 am

There is no investment in the world better than a guaranteed return of at least 17.6% in 6 months (yes, 17.6%; 100/85 = 1.176) (and that's just on the amount withheld from the first paycheck - the money withheld on the last paycheck earns 17.6% in like two weeks). Max out your contribution, and sell as soon as you can. There is no risk.

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Re: Is ESPP as Risky as Stock Picking ?

Post by MindBogler » Fri Apr 10, 2020 11:44 am

rbaldini wrote:
Fri Apr 10, 2020 11:34 am
There is no investment in the world better than a guaranteed return of at least 17.6% in 6 months (yes, 17.6%; 100/85 = 1.176). Max out your contribution, and sell as soon as you can. There is no risk.
It is not a guaranteed return. There is always some risk, especially if the stock is highly volatile. I would say it is accurately described as a low-risk investment.

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Re: Is ESPP as Risky as Stock Picking ?

Post by rbaldini » Fri Apr 10, 2020 11:51 am

MindBogler wrote:
Fri Apr 10, 2020 11:44 am
rbaldini wrote:
Fri Apr 10, 2020 11:34 am
There is no investment in the world better than a guaranteed return of at least 17.6% in 6 months (yes, 17.6%; 100/85 = 1.176). Max out your contribution, and sell as soon as you can. There is no risk.
It is not a guaranteed return. There is always some risk, especially if the stock is highly volatile. I would say it is accurately described as a low-risk investment.
Ok, fine. The company completely tanks and stock is worth literally 0, never to recover. Or stock value happens to plummet the day after they award the stock (by more than 17%), and you forget to sell. Company is in such a bad way that they never pay out. Could happen. (Remember, it doesn't matter what happens to the price in the intervening 6 months, because you get the discount at the lower of the start and end price.) But there's not a better reward to risk ratio available to OP (or anyone). Do it.

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Re: Is ESPP as Risky as Stock Picking ?

Post by MindBogler » Fri Apr 10, 2020 12:03 pm

rbaldini wrote:
Fri Apr 10, 2020 11:51 am
Ok, fine. The company completely tanks and stock is worth literally 0, never to recover. Or stock value happens to plummet the day after they award the stock (by more than 17%), and you forget to sell. Company is in such a bad way that they never pay out. Could happen. (Remember, it doesn't matter what happens to the price in the intervening 6 months, because you get the discount at the lower of the start and end price.) But there's not a better reward to risk ratio available to OP (or anyone). Do it.
I only bring it up because there were a few days here recently where, due to large swings, my ESPP could have resulted in a loss, even with a quicksale. Luckily it did not occur this time, but the possibility is always there.

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confusedinvestor
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Re: Is ESPP as Risky as Stock Picking ?

Post by confusedinvestor » Fri Apr 10, 2020 11:46 pm

OP here

This is exactly was happened with my company's ESPP this period.

I'm a new employee so my offer date is May 18.

So risk can show up anytime, oh well...
MindBogler wrote:
Fri Apr 10, 2020 12:03 pm
rbaldini wrote:
Fri Apr 10, 2020 11:51 am
Ok, fine. The company completely tanks and stock is worth literally 0, never to recover. Or stock value happens to plummet the day after they award the stock (by more than 17%), and you forget to sell. Company is in such a bad way that they never pay out. Could happen. (Remember, it doesn't matter what happens to the price in the intervening 6 months, because you get the discount at the lower of the start and end price.) But there's not a better reward to risk ratio available to OP (or anyone). Do it.
I only bring it up because there were a few days here recently where, due to large swings, my ESPP could have resulted in a loss, even with a quicksale. Luckily it did not occur this time, but the possibility is always there.

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