What Should You Do With Free or Discounted Company Shares?
John Tapie stuffed his laptop in his bag and strolled to the exit. The 32-year old married Brit works for a CyberSecurity firm in Dubai. After a long day at work, he’s ready to hit the gym.
“Do you have a minute?” his boss asks.
I changed John’s name to protect his privacy. But the following financial details are true. You might even relate to them.
This year, John’s employer gave him $20,000 USD worth of company stock. They also said he could buy additional shares at discounts.
His free shares were valued at $20,000 on November 1st, 2023. “I will have the first batch [of shares] available to me on Feb 1st 2024,” he says. “At that point, I could sell them or keep them. And after 8 quarters [two years] I’ll have access to them all.”
John wonders whether to hang on to them or sell them. “The company has done quite well recently,” he admits, “and they have good plans, so I think most of my colleagues will hang on to those shares.”
They might make a fortune. But in part, his colleagues are under an enchanting spell. It’s called, the endowment effect. Psychologists say once we own something (whether corporate shares or an old boyfriend’s ring) we tend to overvalue it. If John or his colleagues keep those shares, they are essentially saying, “They are more valuable than anything else I could buy with that money.”
Perhaps, like John, you’ve been given corporate shares. Should you keep them? Add to them? Or ditch them when you can?
Here’s the test I gave John.
Assume Bill Gates thought your LinkedIn profile photo looked hot (He is newly single, so you never know). He doesn’t want to be creepy, so he anonymously deposits $20,000 into your bank account and leaves you alone.
You can do whatever you want with that money. So…would you invest it in your company’s shares?
When I asked John, he said no. “If I invested it, I would probably add it to my portfolio of index funds.” Rephrasing the question freed John from the endowment effect’s enchantment. If he wouldn’t invest a free $20,000 in company shares, then he shouldn’t keep the $20,000 of company shares that he was given. Money is money, no matter the source.
But that doesn’t mean you should sell free shares. Ask yourself that question. If someone gave you cash (or if you earned it, yourself) would you buy your company shares with that money?
If the answer is no, sell the shares you were given. Like John, you could diversify further, and invest the proceeds in a portfolio of index funds. You could also pay down debt, or join a group of Bohemians for a month in Bacalar.
John also wondered whether he should buy corporate shares at a discount. “We have an Employee Stock Purchase Plan,” he says. “I can buy company stock at a discount, with the proceeds coming from my monthly salary. The company sets the price by looking at the stock’s lowest price over the previous six months. It then allows us to pay 15 percent less than that lowest price. I could then sell the shares or keep them.”
It seems like a no-brainer. After all, plenty of early Microsoft and Google employees did this. And they can now blow their noses with £100notes.But for every Microsoft, there are dozens of now-mangy dogs that supporters once believed would lead the pack.
The American finance professor, Hendrik Bessembinder, published a sobering paper titled, Do Stocks Outperform Treasury Bills? The answer to that question is yes and no. Stock indexes beat bonds…like a Kenyan marathoner would dust Madonna in clogs. But most individual corporate stocks aren’t the ray of light we think.
Every stock has fans that say prices will go to the moon. But Bessembinder found that just 48 percent of US stocks from 1926 to 2015, recorded a long-term gain. That means 52 percent of them didn’t earn a profit. Yes, they might have gained value over a month, a week, or even a decade. But their chances of matching the returns of a stock market index were lower than a gecko’s belly. That’s because just 4 percent of listed companies on the US market from 1926-2015 accounted for a whopping 96 percent of the stock market’s growth. If you own an index, you’ll own those winners.
But what about your company’s stock? It might trounce the market. With the proceeds, you might even buy a Monaco-moored yacht.
Burton Malkiel wouldn’t disagree. But the legendary Economics professor, who wroteA Random Walk Down Wall Street, says buying stock in the company we work at presents two levels of risk.
First, Malkiel says our jobs represent risk. For example, the money John earns to pay for his protein shakes, organic vegetables and razor blades come from the salary he earns at his CyberSecurity company. If his company jumps on a treadmill to nowhere, he could lose his job. That could put him on the next flight to England…just in time for the lovely winter rain.
If John also owned a wheelbarrow of company shares, he would double that risk. His current income would rely on his employer, and his future retirement would, too.
This is why Malkiel says investors shouldn’t keep more than 10 percent of their portfolio’s value in their company’s shares.
In John’s case, that 10 percent might come from years of dollar-cost averaging into his discounted employee purchase program. Yes, he could push that allocation to 50 percent of his total invested assets. It might even get him that yacht.
But that yacht would be set on the rim of a canyon. And he would have to walk a tightrope to get to that boat.
Instead, if the vast majority of his portfolio were invested in a globally diversified portfolio of index funds, he would spread that risk among thousands of different companies, dozens of corporate sectors (tech, pharmaceutical, retail, entertainment etc.) and dozens of geographic markets.
Betting your future on a single stock will always be a gamble.
So…what do you want to do?
Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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