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First, writing this article makes me nervous even before beginning. The reason is that there can be a lot riding on a person's company stock, fortunes have been made and lost with company equity and I've seen the best, and sadly the worst over the years. Ultimately we are dealing with uncertainty, the uncertainty around what a single stock will do, which is impossible to predict, and therein lies the angst. Over time I've found the best way to deal with this uncertainty is to follow time-tested principles, and let the chips fall where they may. Below are some principles I feel are worth following when evaluating your company stock.
Know Yourself First: Its important to understand the emotions involved in these decisions. If you sell and make a profit, that should be a good thing, but if the stock keeps climbing higher after you sell, you could experience FOMO (fear of missing out). The reverse is also true, if you don't sell your stock, and the stock heads lower, you'll likely experience a sunk cost phenomenon and it will be hard to sell the stock "at a loss". Its best to understand that there will never be "the best time", if you're lucky enough to sell at the perfect time it was just luck, its best to methodically create a plan and adhere to it.
Sell when you (or the market) No longer believes in the company: This is a painful reality for most employees. The fact that they work for a company often creates a bond, and fondness for the organization. This creates tension when a person wants to sell stock, because they feel they're almost betraying their company. The reality is all companies go through good times and bad, some quick and some sustained, but if the underlying fundamentals of your company, or even its industry are deteriorating , it may be cause for selling some of your stock.
Sell your stock due to opportunity cost(s): The reality is we all have a limited amount of investable resources, and sometimes an investments future prospects may not be as good as another. In technical analysis we use a measure called relative strength to see how one investment is performing relative another. This can be useful to judge how your company stock is doing relative to the overall market (SP 500), stocks in a the same industry, or even relative to other asset classes. Relative strength like anything is not a silver bullet, if your company is currently underperforming it doesn't qualify as an immediate sale, but it should be taken into consideration.
Sell because your stock has increased in value: Warren Buffet has been know to say "I made all my money selling too soon", and I think that wisdom is important to live by. You're never going to time the "top" either in the market or a single stock unless you just get lucky. The fact remains that you bought stock with the hopes that it would gain in value and you could sell it for a profit at some point in the future. If you've been fortunate enough to be on the right side of the stock market, and your stock has increased in value, you should always be looking to harvest some gains when necessary. Not only can you use your own gain and loss in the stock to evaluate value, but you can also look too the companies valuations metrics, things like price to earnings, and other financial metrics to see if the stock is rich and may have run its course. Either way, be reminded that you bought this stock not to hold on to indefinitely but to sell it for a gain at some point, now may be that time.
Sell your stock for personal cashflow reasons: Though not a judgement on the company, you may need to sell the stock for a variety of personal reasons such as to create adequate emergency reserves, fund a new home purchase or other expense, or just to reduce your personal risk to that single stock.
A note about taxes: We've all been told to not let the tax tail wag the investment dog, but we also see that people are reluctant to sell their company stock because they don't want to pay the taxes. While anyone can appreciate postponing a impending tax bill, you'll likely have to experience the tax at some point, and if you don't, you probably don't have a tax bill any longer because you no longer have a gain. While there are tax strategies you can deploy company stock towards, assuming you are not using the stock for those purposes, sometimes its best to just pay the tax and move on.
The Takeaway
The bottom line is that company stock can create or destroy a personal fortune and should be treated with the care it deserves. Evaluating your company stock positions against a variety of factors, some listed above, while staying pragmatic following a strategy that you adjust as time and events dictate. The fact remains that these decisions can make or break retirement plans and as a result should be dealt with head on.
