How Much Company Stock is Too Much?
Investing in the stock market has historically provided great returns. However, history is also full of examples of individual companies that have lost value or been involved in fraudulent activity which resulted in devaluation or dissolution.
If you work at a company that offers equity to their employees, you’ll want to do a careful evaluation of how much risk you’re opening yourself up to by holding equity in your company’s stock. This equity can include things like incentive stock options, nonqualified stock options, restricted stock units, and employee stock purchase plan shares.
No matter which type of equity you choose to hold in your company’s stock, you’re exposing yourself to added risk and should carefully weigh whether you’re holding too much or too little.
The goal of this article is to provide insight into some of the factors that can help you determine how much company stock is too much for you. With a heavy emphasis on you.
Short Answer = It Depends on Your Situation
No one likes to hear this answer, but when it comes to personal finance questions, this is usually the response. Wise financial decisions (like a great custom suit) must be tailored to fit the individual and their unique circumstances.
Holding $100k in Amazon stock represents an entirely different level of risk for someone with a net worth of $100k versus someone with a net worth of $1M. And we can certainly also agree that holding $100k in Amazon stock is very different than holding $100k in Gamestop stock.
There are many factors that are important in making the decision of how much stock to hold. In this article, we’ll focus on just one: How much company stock is too much based on personal assets? In future articles, we’ll address other factors (e.g., How to evaluate your specific company when deciding how much its stock equity to hold).
Determining How Much is Too Much Company Stock For You
The risk exposure you have in holding company stock depends primarily on three things:
(1) The mix of assets you own, (2) the debts you’re obligated to pay, and (3) what you intend to do with your investments down the road.
Basic Personal Financial Metrics to Help Decision Making
Determine your Net Worth - To do this, add up your Total Assets and subtract it from your Total Debt.
Assets include things like your checking and savings accounts, investment accounts, retirement accounts, and homes. It will also include the total amount of company stock you own. You may include things like cars or other assets, but for this calculation it’s not as helpful.
Debt includes things like credit cards, student loans, and mortgages.
If you aren’t currently tracking your Net Worth, we highly recommend you do. Tools like Mint and Personal Capital are great ways to track your Net Worth over time and can also help you track and budget your spending.
Add up the total amount of company stock you own.
If you didn’t already do this as part of the Net Worth calculation, do this now.
If you want to include unvested RSUs or unvested options, you can, just make note of how much is still unvested.
Another note here is that if you work for a large tech company, you probably own company stock within the major funds you hold in your retirement account or 401(k). For example, VTI (a common investment) is made up of 4.7% Apple and 4.5% Microsoft. This isn’t a bad thing, just something to be aware of.
Break the Assets within your Net Worth into categories aka Asset Classes.
We like to make the comparison of Asset Classes to food items. Just as you classify food as fruit, veggies, proteins, breads, drinks, desserts, etc., Asset Classes can include things like US Stock, Foreign Stock, Bonds, Real Estate, etc.
Some Assets can represent their entire category. For example, if you have no other real estate holdings, your home would also represent your Real Estate Class.
Create percentages of each category.
Be sure to determine the percentage of company stock you own.
Note: We prefer to use Excel or Google Sheets for many basic calculations like this. You don’t have to be perfectly accurate, you just want to get close enough that you get a good picture of your situation.
Below is a simple calculator you can use. Here is the Google Sheets version.
Questions to Evaluate If You’re Holding Too Much Company Stock
Now that you’ve calculated both the dollar amount and the percentage of company stock you own, the following list of questions will help you get a sense of what you should do with your stock.
Do you have any debt? What type of debt is it? How quickly have you been paying it down?
If you have credit card debt, it probably makes more sense for you to pay down your credit cards before investing further.
If you have student loans, you’ll want to keep the percent of company stock to net worth relatively low (under 15%) as you continue to pay down your loans. This one can vary a bit depending on whether you have favorable interest rates or not.
If you have a mortgage and that’s the only debt you have, then you can invest as you normally would and can likely afford a little more risk than other groups of people. That said, you’ll want to review the questions below.
Are you saving up for anything that you plan on purchasing soon?
If you’re saving for a house or a car, company shares can help fund your purchase, but if you will be making that purchase soon (within the next year), you’ll want to minimize the downside risk of your company shares decreasing in value by setting aside what you need now in cash.
Did your company recently go through an IPO?
If the company you work for recently IPOed, you should be aware that your company’s ups and downs will be amplified. Individual investors and big investors alike are anxious to invest in these companies and large price swings are very common.
If you answered yes to this question, we recommend selling a portion of your company holdings as soon as you're able. Once you’ve sold, you can save some of the proceeds or reinvest elsewhere.
Am I expecting to receive more stock or RSUs in the future?
If you’re expecting to receive additional stock through Restricted Stock Units (RSUs) or through purchasing stock through an Employee Stock Purchase Plan (ESPP), you should lean toward selling some of your current holdings.
If you’ve been granted RSUs, your RSUs will grow in value as they are vesting, giving you the opportunity to participate in your company’s growth.
The same can be said for ESPPs. Some ESPPs (like Adobe’s), give employees the option to purchase company stock at a 15% discount (sometimes even greater). This enables employees to participate in the growth of Adobe and facilitates selling and diversifying current Adobe holdings.
Do you still work for the company whose stock you own?
The assumption thus far has been Yes, so if the answer is in fact Yes, this adds an additional layer of risk. It’s not likely you’ll be fired or that your company will go out of business; however, right now your salary, retirement benefits, health plans, etc. are all being provided by the same company. So if something bad were to happen, the effects would be amplified.
Is your company Apple, Amazon, Google, or Microsoft?
If the answer to this question is Yes, then you’re probably more invested in these companies than you realize. Since these companies are some of the largest in the world, they are included in all the major U.S. index funds, mutual funds, and other investments. If you have a 401(k), a considerable portion of your investments are likely tied up in these companies.
These holdings should be taken into consideration when calculating holdings of company stock (although making these calculations may be a bit more challenging). If you work for one of these companies and that company makes up more than 50% of your holdings, it’s entirely likely that after taking those other funds included in your 401(k) into account, your holdings in that company stock may actually be closer to 60%.
How would you feel if your holdings dropped by 50%? What Impact would that drop have?
Of course, it’d be really bad.
However, if your Net Worth is $100k and your $2k holding of Apple dropped from $2k to $1k, it’s not the end of the world and you’ll probably recover quickly.
But, if your Net Worth is $100k and Apple makes up $80k of that number, losing $40k and being left with a Net Worth of $60k could be very painful and take a while to recover.
As the percentage of your Net Worth includes more and more company stock, we recommend that you look to diversify sooner rather than later.
Does your company stock make up 90% of your net worth?
If your answer is Yes, we strongly recommend taking some risk off of the table.
This large percentage doesn’t start making sense until your Net Worth is so high that the remaining 10% would be large enough to cover all of your lifetime needs. People like Jeff Bezos and Elon Musk might be in this group, but most of us certainly aren’t.
How do you feel about missing future gains? Is it worth the risk of losing value?
If you sell a portion of company stock, there’s a chance that you’ll miss out on some future gains. However, if your company continues to do well in the future, this probably means other companies you’re invested in are also doing well.
If you sell company stock and stay liquid in cash, you’ll miss out on potential gains regardless. But, if you sell and then reinvest into other, well-diversified holdings, you’ll be better positioned to capture future gains.
Do You Know What Impact a 20%, 50%, 90% Drop Would Have on Your Net Worth?
You can calculate each of these percentage drops pretty easily using your phone or spreadsheet, and we strongly recommend you run the numbers and then try to imagine how you’d feel.
Do you get stressed watching your company stock price?
If you’re overly stressed about your company’s stock price, it’s probably because you hold too much stock in the company you work for. Selling company stock and spreading the risk into other investments should help to reduce your anxiety..
If you’re the type that checks stock prices every day, STOP. You don’t have to do that. You shouldn’t be making investment decisions based on regular daily movements. TV Shows and Youtubers are motivated by views and attention; their motivation is not to help you improve your finances or reduce anxiety levels about your finances. One of our favorite financial writers, Carl Richards, calls financial news “financial pornography” and we think it’s quite fitting.
Typical Rule of Thumb for Company Stock and Our Recommendation
Numerous financial blogs and financial advisors will say that your position in company stock should be no more than 10-15% of your Net Worth.
The reality is that although concentration can build wealth quickly, it can evaporate that wealth even faster.
Diversification helps preserve the wealth you’ve built.
What’s best for you will vary based on your situation. While “rules of thumb” make good guidelines, it may also be wise to stray from them selectively, carefully, and on occasion.
If after reading this article and doing the calculations we’ve suggested, you are still unsure whether or not you are too heavily vested in company stock, we recommend talking things over with an independent, fee-only financial advisor who can provide you with additional insight and advice. Please feel free to contact us if you have any questions. We have partnerships with Certified Financial Planners throughout the U.S. who would be happy to help.