“Happy, in that we are not over-happy.”
— Shakespeare, Hamlet
Stock options, restricted stock units, and other types of equity compensation can be valuable benefits that inspire people to keep their jobs and stay motivated at work. Shares of companies in hot industries can skyrocket amid a strong economy and prosperous stock markets. On the wings of stock compensation, dreams of getting rich can soar. However, markets sometimes falter. High-flying stocks can plummet. Shares that seemed headed for new stratospheric heights can quickly tumble to Earth.
Don't panic. Let your stock grants encourage you to act and feel like a committed owner.
When things don't go as well for your company or the stock markets as you had hoped, it is important to remember that stock compensation is a long-term deal. Obsessive scrutiny of the company ticker symbol is unhealthy. Ecstasy can swiftly turn to anxiety when the stock price swings up and down like a yo-yo.
Tips For Staying Sane In Volatile Markets
Despite the intermittent volatility that has shocked the markets over the past several years, stock compensation remains popular, whether it consists of non-qualified stock options, restricted stock/RSUs, stock appreciation rights, or employee stock purchase plans. While certain companies and industries routinely experience more volatility than others do, the stock prices of all companies can fall amid concerns about the economy. Don't panic. Your company's shareholders are in the same boat, but with real money at risk, and are counting on your stock grants to inspire you. They want the grants to encourage you to act and feel like a committed owner.
Experts have a few words of advice for dealing with the craziness. Below are 11 tips from experts in financial planning, human resources, and psychology about how to stomach the wild ups and downs that stock prices can experience.
1. Stop expecting quick riches.
Think of equity compensation as a tortoise rather than a hare. “You've got to remember that most stock options have a 10-year life. It is a long-term incentive,” says Mark Edwards, a compensation consultant on the west coast. “A whole lot of folks out here like to talk about internet time, not looking out beyond a year or 18 months.” Though the stock price may be down or unpredictable now, your stock options will have great leverage if the stock price rises again later in their term. This potential upside can be very rewarding.
With restricted stock or restricted stock units (RSUs), you receive at least some value at vesting, even if the company's stock price has fallen. This can balance out some of the volatility of stock options, but the potential upside with restricted stock and RSUs is less dramatic. You can therefore consider restricted stock/RSUs as the more conservative part of your stock compensation portfolio. To compare in detail the differences between stock options and restricted stock.
2. It can be more fun — really!
Believe it or not, volatility can be exciting and profitable, according to Corey Rosen, a former executive director of the National Center for Employee Ownership. Mr. Rosen asks employees at companies with rollercoaster stock prices which type of company they would prefer to have stock options in: one with a constant 10% annual gain or one with the same annualized gain over 10 years but with peaks and valleys that greatly exceed 10%.
While you don't want to fixate on your company’s stock chart, these ups and downs actually present better opportunities for profiting on stock options over the 10 years you have to exercise them. For example, employees with incentive stock options (ISOs) who plan to exercise and hold will reap more net tax gains if they exercise at lows and sell at highs.
3. Use options for big things.
Don’t depend on unexercised options or unvested restricted stock to cover regular expenses like car payments or mortgages, advises Richard Haas, president of Financial Catalyst Group in Sunnyvale, California. People who plan on using gains from stock grants to cover living expenses can wind up in deep trouble if the share prices tank. Anchor your spending on your cash salary and what you have in the bank so that your lifestyle is no worse off if your company's stock price shrinks.
Mr. Haas recommends paying for big purchases with cash from option stock sales. He also cautions clients with ISOs to keep enough cash on hand to cover future tax bills, as there is no tax withholding at the time you exercise ISOs or sell the stock.
4. A watched pot never boils.
Remember that watching the company’s ticker symbol on your computer screen for eight hours a day will not make the stock go up. Employees may be far more satisfied with the performance of options and other stock grants if they check their worth a little less frequently. “Imagine you went away on a one-year trip, didn’t check the news the entire time, and then looked at your company’s stock price,” Mr. Rosen says.
5. In many industries, volatility is the norm, not the exception.
Get used to turmoil in certain industries. Indeed, in those areas, fluctuations of share price may be around for a while. At the same time, it is also helpful to remember that the dark crisis which befell the stock markets during 2008 and 2009 was historically unusual.
6. Know your options.
There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). Identifying which kind of grant you have is key for making sound investment decisions in a volatile market. If you have both types of options, in stable markets it may make sense for tax reasons to focus on which type to exercise and whether or not to hold the shares. However, in a volatile market it is safer not to let tax decisions drive your choices: instead, look at where your company’s stock price sits in its trading range, what its prospects are, and what your time horizon for the money is. With these elements in mind, you are more likely to exercise the options and sell the shares at the same time, so the net gains with ISOs and NQSOs are essentially the same. This makes any concerns over the alternative minimum tax (AMT) and long-term capital gains somewhat irrelevant.
7. Seek help from good advisors.
Don't make all the decisions yourself. Stock options, restricted stock, and employee stock purchase plans are complicated financial instruments. Finding an accountant, a lawyer, or a financial planner who is familiar with the tax and investment ramifications of company stock sales is a good way to avoid making rash decisions, particularly when a substantial chunk of your net worth is tied up in your company’s stock grants.
Volatility in the market helps you rethink your greed-to-fear ratio.
A good advisor can help your decision-making with questions that you should be pondering now if you have exercised ISOs at a market high and are holding the shares. According to Art Meyers, a lawyer with Choate, Hall & Stewart in Boston, “If employees hold ISO stock from exercises this year, and if the price of the shares has dropped substantially, they need to analyze whether it makes sense to sell the stock in the same year to cancel any potential AMT hit.”
8. Greed or fear?
Now is the time to reassess your greed-to-fear ratio. Volatility in the stock market helps you rethink your attitude toward financial risk. Take a look at your asset allocation for all your investments. This review should include your company stock options, unvested restricted stock, ESPP shares, and stock holdings in taxable and 401(k) accounts. If you have stock compensation, you may find that you to have too much in one basket, i.e. your company’s stock. If so, you will be less nervous when your net worth is not riding on that single stock. Diversification is a basic part of sound investing.
Alternatively, you may find that your company's stock price is quite undervalued and that now is a great time for also buying it on the open market or through an employee stock purchase plan.
9. Stay loose.
“Hang on and don’t worry about it,” advises Sandra Sussman, a former executive director of the National Association of Stock Plan Professionals. Ms. Sussman says employees should focus on the aspects of their company’s performance that they can control. In addition, she reminds them to remember that they are owners, with all the benefits and risks that this brings, and that they should not get too riled up over market forces.
10. More grants ahead.
While companies are reducing the number of employees who are eligible for stock grants, your first grant of stock options or restricted shares is unlikely to be your last. Stock options have built-in tax-deferral advantages that make them more beneficial than mere cash bonuses. When share prices fall precipitously, companies sometimes issue new grants, but don’t expect your company to reprice underwater stock options. Down markets can be a good time to get a new stock option grant, as your exercise price will be lower than your company’s usual trading range.
Focus on aspects of company performance that you can contribute toward.
Also, many companies with very volatile stock prices are shying away from doling out options in one lump. Your company may prefer to grant batches of options every several months. Some companies are even granting combinations of options, restricted stock, and performance shares.
11. Keep your perspective long and broad.
Resist the urge to switch employers just because your company’s stock price has tanked. Job-hopping can lead workers to what Dell's founder Michael Dell has called “day-trading with their lives.” Loving your job and what your company is doing brings real satisfaction. If you quit and move to a company just for a more auspicious stock price, you may end up with a boring workload, stressful colleagues, and a lot of regret.
Joanna Glasner is a venture capital and private equity reporter at PE Hub, a Reuters publication, and previously worked for Wired.
Matt Simon is an editor at myStockOptions.com.
Bruce Brumberg is the editor-in-chief of myStockOptions.com.
Content is provided under arrangement with myStockOptions.com, an independent source of online stock plan education and tools. Copyright © 2015 myStockPlan.com, Inc. Please do not copy or excerpt the myStockOptions.com content without express permission from myStockPlan.com, Inc.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Clients should consult their personal tax advisor for tax related matters and their attorney for legal matters.
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