Recently, you may have noticed the widely publicized decline in the stock market. For those of you who receive Equity Compensation from your employer, times like these may cause a sense of financial uncertainty. Whether you receive restricted shares or stock options, it can be tough to handle a temporary loss of value in your company stock. It’s important to remember that generating wealth from Equity Compensation is a balance between risk and reward that requires careful planning.
Here are 7 tips on how to stay calm and handle volatility in your company stock.
1. Manage your expectations
You need to think of Equity Compensation management as a marathon and not a sprint. Equity Compensation can be extremely valuable for those who stick with their company over the long haul, but should not be viewed as a short-term path to wealth. Stock options usually have a 10-year expiration, and you need a solid plan for anticipating the best time to exercise your stock options during that 10-year period.
2. Volatility can be beneficial
Although volatility is often perceived as a negative, it can be surprisingly profitable under certain circumstances. While you should never fixate on the daily price of your company's stock, periods of ups and downs in a stock price can present opportunities for creating extra tax benefits on your options. Complex tax laws govern exercising and holding incentive stock options (ISOs). It turns out that you can save tax dollars when you exercise your ISOs at their low values and sell at their highs. This allows you to possibly avoid more AMT and realize more capital gains. Also, if your employer grants you stock options when the stock price is low, it can generate extra gains when the market improves.
3. Don't rely on your Equity Compensation to pay bills
Equity Compensation can be a great way to build wealth, but the amount of money you will earn can be very uncertain. Therefore, you should never rely on Equity Compensation to pay for living expenses, mortgage payments, your children's college tuition, etc. If you rely on selling your company's stock to pay for these expenses, you may be in trouble when the market dips or if an unexpected event causes the price of your company stock to tank altogether. You should base your monthly spending on your regular salary, so your lifestyle is not negatively impacted when your company's stock price falls.
4. Volatility is normal
It’s important to remember that volatility is normal. Every company that obtains long-term gains experiences short-term fluctuations in their stock price. It’s best to fix your attention on the long term potential of your company, and not be overly concerned about stock market volatility. Also, remember that unusual periods of declines in stock prices are ordinarily followed by periods of recovery.
5. Learn about the type of Equity Compensation you have
During periods of market volatility, it is essential to know what forms of Equity Compensation you are granted. Identifying the key features and tax laws related to your specific grant is imperative to making important decisions in volatile markets.
6. Reassess your risk vs. reward tolerance
How you handle and manage your Equity Compensation is often determined by your willingness to bear the risk. Equity Compensation can be very valuable to employees, but there is the possible risk of stock options losing their entire value overnight. Remember the dot-com crash of 2000? You need to create a plan that takes into consideration the balance between the potential risk and the potential reward of holding your stock options. Periods of volatility give you the opportunity to rethink your risk tolerance for stock price fluctuations, helping you to make better decisions in the future.
7. Focus on the future
Take the lessons from the past and periods of stock price decline to create a realistic plan to manage your Equity Compensation in the future. When employees see that their company stock price is high and continues to rise, they often decide to hold on to their options, expecting that the stock price will continue to increase. This is can be a dangerous assumption. Periods of market decline will help employees realize that it is possible for a rising stock price to fall unexpectedly.
Working with a professional to manage your Equity Compensation plan can provide a tremendous advantage in identifying the optimal times to exercise stock options and maximize their value. At Clearview Financial, we specialize in helping Equity Compensation recipients develop personalized plans to manage and maximize their stock option profits.
We utilize a system that provides algorithms which can track the current value and calculate the potential future value remaining in your stock options. This system can help to predict future potential rewards and potential risks. Stock options are tracked 24/7 and we can provide you with email alerts at the optimal time to exercise your options. The technology we use can increase your ability to get the most out of your options and prevent you from making rash decisions in a volatile market.
If you would like to learn more, contact me at mark@clearviewfin.com or visit our website at www.clearviewfin.com. I would be happy to answer any of your questions.