Volatility in share prices and falling markets will unnerve anyone — especially this time around. Between the market lows of 2008-2009 and the recent market shock caused by the pandemic and inflation, many employees who held stock options and restricted stock units (RSUs) only saw share prices rise. For many of you, the recent market drop may have been your first ride on a roller coaster of volatility. Should you change your financial plan or stick with it?
Financial strategies for equity compensation in the face of volatility and falling stock prices were the main topic of two recent webinars hosted by myStockOptions.com on various aspects of stock compensation, employee stock purchase plans (ESPPs) and company stock holdings. has abundant resources. In one webinar on stock option exercise strategies and another on restricted stock and RSU planning, a panel of financial advisors and tax experts discussed how to navigate volatility and depressed markets. This diverse group, including CFPs, EAs, and JDs, presented various insights from different perspectives.
1. Listen to your risk tolerance
Ameriprise (Minneapolis) financial planning case manager David Marsh noted during a stock options webinar that market declines provide a useful period to “confirm or reset risk tolerance.” He observed that in good times for your company’s share price, it’s easy to become aggressive and optimistic in your financial strategy. It’s harder to maintain that resolve when stock prices plummet. In fact, he goes on to say, falling stock prices can give you a useful reality check on your investment risk tolerance.
He advises you to listen to what your emotions during a downturn are telling you. “How much downturn are you willing and able to withstand, and how does that affect your goals? If you’ve been relying on stock-based compensation to meet daily living expenses, that’s a real danger zone, exposed in stock price volatility and downturns. ” The insights you gain from dark times for stock prices can help you revisit your stock earnings goals and reassess the discretionary part of it.
For ineligible stock options, the reduction in the spread between the stock price and the strike price appears to create an attractive opportunity to exercise the option, he continued. When the stock price finally recovers, this begins a holding period for the tax-favored treatment of selling long-term capital gains. This is a common strategy for Incentive Stock Options (ISO).
However, for non-qualified stock options (NQSOs), the same money may be put to better use. “You should compare whether to exercise and hold the NQSO, or just hold the option and put cash in another way,” he suggested. “Consider investment risk and tax considerations. What I would keep in mind is that if you have enough game to exercise NQSO at this point, I would say let’s take that cash and simply buy more shares. If the share price does recover, pass Increase the company’s equity position and we may generate better results.”
2. New option grants welcome, but with a layoff plan
In a stock options webinar, Megan Gorman, founder of Checkers Financial Management (San Francisco), added to David’s idea that a depressed stock price is an excellent time to get a new stock option grant. She emphasized that long-term engagement is key to the success of equity compensation. “If you go back to March 2009, when the stock market was bleak, it was a good time to get grants at very low strike prices,” she observed. The stock price gains during the prolonged recovery made the options granted at the time extremely wealthy.
But beware of layoffs, she warned. Options are granted for a limited period of time, usually only for a short period before the option can be exercised after the job is terminated. “It’s important to have a strategy for exercising options and selling stock if you get fired. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose your hard-earned equity rewards.”
3. Don’t forget the big picture, but revisit your cash position
Keep your macro financial goals in mind, advises Chloé Moore, founder of Financial Staples (Atlanta), in a restricted stock/RSU webinar. “It’s a bit volatile right now, but take control of your financial goals. Focus on the things you can control: keep accumulating savings, pay down debt, put yourself in a stronger financial position to protect yourself as much as possible from the turmoil of volatile markets. influences.”
To that end, now is a good time to add to your cash position, she noted. “Your restricted stock units can help with that,” she noted. “It’s a good reason to sell your stock as soon as it’s vested.” She asserts that if you’re using RSU to fund your lifestyle, it’s critical to “revisit cash flow.”
4. Try to be logical rather than emotional
This is often easier said than done, but it’s an attitude worth strengthening. In an RSU webinar, Meg Bartelt, founder of Flow Financial Planning (Bellingham, WA), talks about the irrational tendency to place too much emphasis on the grant price of restricted stock/RSUs. If the stock price is somewhere between grant and vest, this psychological “anchoring” can make it easy to feel as though you’ve lost something.
“If you had a Google RSU a year ago, it’s really frustrating that the grant value is much higher now,” she said. “Your projected compensation used to be $500,000. Now it’s $300,000. But it’s important to remember that $500,000 isn’t yours at all. If you stay at the company long enough, the only thing you have is the number of shares … Be aware of this bias.”
Should you hold RSU shares or sell them? Meg noted that the test to answer that question “doesn’t vary with stock price.” Instead, she continues, it’s always this: “If you had the same amount of cash, would you buy stock in the same company?” If the answer is yes, you probably want to hold your stock. If the answer is no, you might want to sell them. “The answer may change with stock prices and market conditions, but not with the logical framework,” she stressed.
Daniel Zajac, managing partner at Zajac Group (Exton, PA), suggests an alternative approach that minimizes downside risk in volatile markets if you own both stock options and RSUs. Speaking with Meg and Chloé on the RSU webinar, he suggested doing an analysis to determine if it makes sense for you to hold vested RSU stock, rather than exercising your options and selling them. This protects the revenue generation required for a specific target.
5. Watch your estimated taxes; look ahead to future grants
Meg also observed that the big drop in income between last year and this year means you should revisit your estimated tax payments if you pay them to keep up with the surge in income from RSU vesting. “The estimated tax bill for this tax year is based on last year’s income. If you use last year’s estimated tax stamp to offset this year’s low income, you will have a lot more estimated tax this year.”
She goes on to say that if you lower your estimated tax amount this year, the reverse is true. If the stock price picks up next year, you want to make sure you’re not underpaying your estimated tax due to lower income this year.
Daniel agrees with Meg, emphasizing the importance of “actively working with a CPA” to ensure you don’t overpay or underpay your estimated taxes throughout the year, rather than simply relying on a safe harbor based on your previous year’s income. “If you have substantial equity compensation,” he said, “you should check your estimated taxes quarterly.”
Daniel and other speakers at the RSU webinar also pointed to new opportunities arising from falling stock prices. If your annual equity compensation is based on a percentage of your salary, “you may get additional shares because the stock price is lower.” That’s good news to offset the bad news of a lower stock price.
6. Now is the time to seek professional financial advice
Bill Dillhoefer, CEO of Net Worth Strategies (Bend, Ore.), which developed the StockOpter analytics tool, urges employees with equity during a downturn to seek the advice of a professional financial planner if they haven’t already. if). “When the stock price goes up, you might get advice from the water cooler chat and think you don’t need a financial advisor,” he said during a stock options webinar. Confidence is easy in a bull market. However, when stock prices fell and a bear market loomed, the game changed.
Bill highlights the extent to which a financial advisor can help you make better decisions and avoid mistakes with stock-based compensation. A good advisor can “establish and track diversity standards based on risk.” He recommends understanding your “lost value,” a metric that consultants can calculate that shows how much value you lose when you leave the company to work for a competitor. Even if you’re generally confident in your personal finance knowledge, advisors can help you “more safely navigate these volatile markets without going crazy.”
The webinars in which these financial planning experts speak are available on-demand on the myStockOptions webinar channel:
The myStockOptions.com website has additional resources and tools for financial planning in volatile and depressed markets.