Not sure why the other comments are so negative. I don't see how you can dispute that having a large part of your net worth in a single stock leaves you vulnerable if anything happens to it. There's also the fact that your fortunes are still very closely tied to your company's through unvested stock, bonuses, and employment. Regardless of how positive you are on your company, you're probably already sufficiently invested in it. I can't imagine any combination of individual situation and risk tolerance that would make holding a large amount of a single publicly-traded stock an optimal investment strategy.
Don't forget your house, its value is dependent on the local economy, which could be tied to your employer. If you own a house in a town that is largely employed by ACME, and you work there, and you invest your money in ACME, if ACME goes under you lose your job, your retirement savings, and potentially the value of your home.
> I can't imagine any combination of individual situation and risk tolerance that would make holding a large amount of a single publicly-traded stock an optimal investment strategy.
It can make sense if you have a significant impact on the performance of that stock. It's pretty common to give the C-level executives a lot of stock in the hopes that they drive up the value of that stock. This is also what activist investors do; buy a lot of stock, get a position on the board, try to drive up the share price.
However, anyone taking advice from HN comments isn't in one of these situations.
Since the RSUs are a significant (ex: 90%) part of their equity portfolio, it makes a lot of sense to diversify here. (It's like founders selling 20% of their stake at IPO and buying an index ETF with the proceeds)
I think this would be different if an engineer went to work for GOOGL at age 35. At that point their assets would be diversified across various equity and/or real estate holdings and the GOOGL shares would represent a large but not overwhelming portion of their equity holdings within their greater portfolio of assets.
I started with BigCorp at age 33, after leaving academia with a phd and equity measured mostly in magic: the gathering cards. So, uh, yeah. Assets.
- (I don't actually own any M:TG cards, which I use here as a glamorous stand-in for my actual hoarde of obscure tabletop RPG's, bits of electronics that could one day be synthesizers, and books about representation theory.)
Exactly! If I was given $5000 in cash and my impulse is not to immediately run out and buy Facebook shares with it, why then should I do anything else but sell $5000 worth of Facebook shares that I get given?
> Dan tells me that he plans to hold on to his Facebook shares. He's going to sit on the nest egg while it grows and matures. He'll slowly nourish it with solid technical contributions until it turns to a small fortune. Facebook, he says, is valued at a small fraction of what it will be in 5 years.
First, if Dan's thesis is right (Facebook "is valued at a small fraction of what it will be in 5 years"), you don't need to work at Facebook to profit. You can invest in FB shares, or even long-dated options, and let folks like Dan do all the hard work.
Second, the real question for Dan is how much of the dollar value of his equity compensation he should hold in FB shares. If Dan has $50,000 in investments, virtually all of which consist of FB shares, that's problematic, even if he believes strongly in his thesis.
> You should think of the grant as cash compensation. If you decide to not sell the stock immediately, this is equivalent to taking out a portion of your paycheck to buy stock in your company.
This is spot on. That doesn't mean that employees shouldn't retain some of their shares, but they should consider whether they'd purchase the same number of shares if they had a pool of cash to invest.
I agree the article is correct that he should sell even if he believes his thesis, because as an employee he doesn't really control FB's direction in any meaningful way and yet depends on it for his livelihood.
Also the P/E of Facebook is currently 98 vs the average of 15 and Apple's 13, so Dan's thesis (say 100x growth in stock price) would require 100x growth in revenue or a huge drop in costs. Neither seems likely given the historical fate of walled gardens like FB and the trouble both FB and Twitter have seen substantially profiting from their audience in a sustainable way. Facebook is looking pretty frothy to me at the moment and its long-term dominance far from assured, let alone its ability to grow revenue.
There's a more concrete, specific reason, than generic risk that you should consider and discount the stock price of the company you work for accordingly: it is less liquid for you relative to the market, because you cannot trade it in blackout periods. Lack of liquidity is a cost to you, therefore, if you work at Google, a share of GOOG should be less valuable to you than the market price (assuming you consider the current market price to be fair, which is a totally different matter).
In 1999, an accquaintace of mine had his Internet company bought out for $1 million in cash and $19 million in stock of the buying company with a 2-year vesting period. One year later he was given the option to cash out his stock early, but given the momentum of the stock market at the time (he now had nearly $30 million in stock) he elected not to cash out.
A few months later the tech stock market crashed.
He lost his wealth, his job, his wife, the house and the cat.
> He lost his wealth, his job, his wife, the house and the cat.
Loss of life partner caused by financial hardship is actually a blessing... Better find out as early as possible that finances are a critical part of the relationship.
I just sold all of my Microsoft stock two days ago and now I come across this article. Avesh is absolutely right about the points he is making and I think that everybody who are entitled to stocks as a part of their payment package should sell these immediately and construct a more balanced portfolio instead.
If you (like myself) feel like you are better at writing software than acting like a wolf on Wall Street you should take a look at index funds. An index fund is a fund that reflects the development of an index (e.g., S&P 500 or FTSE 100). Rather than paying a portfolio manager a high fee (of up to 5% of the invested portfolio) to actively manage your investments, an index fund is designed so that it simply follows an index. This is much cheaper than actively managing the portfolio. Since John Bogle came up with the idea about 40 years ago and founded The Vanguard Group, history has proven time and time again that active investors can't beat the market in the long run. Index funds therefore yield a higher net return because of their lower costs (typically around 0.5%).
If you are new to investing, I would suggest to go with the three-fund portfolio[1]. Divide your portfolio into three parts and invest in a domestic stock market index fund, an international stock market index fund and a domestic bond index fund. This would probably yield an annual return of 10-15% with a very controlled level of risk. I have constructed my portfolio like this and I am really happy about it. I don't have to constantly worry about my investments and at the same time I can expect a fairly solid rate of return.
Well said. Of course, the entire premise can be justified succinctly by recognizing that a portfolio consisting of the typical 23 year old tech grad's net worth ($25-$100k) plus the first round of grants from a large tech company ($10-$40) would consist of 9.1%-61.5% stock in a single tech company. Keeping the stock would put you anywhere from foolishly to comically over invested in the company.
Even more reason to sell that stock and pay back the student loans. While student loans will more than likely have a lower interest rate than the interest you earn on a successful company's stock, student loans are forever and can't be forgiven except in rare circumstances (in the US). Pay that off and don't be so stupid as to take student loans again!!
Are you referring to student debt vs starting salary with your net worth comment? Otherwise I'd love to know where the average student is graduating college with such healthy investment portfolios.
Not student. By "23 year old", I meant a CS grad one year out of school who has been working for a year at a large tech company. Even if the tech grad had the 2014 national average student loan debt of ~$29k for all majors (tech majors have less debt), after 1 year the student will have easily paid off the debt and saved $25k.
Such a person won't be a "typical tech grad" as the typical tech grad is not going to end up at Google (there just aren't enough slots, if nothing else). But, in the parameters, gotcha.
I know a couple of senior managers who follow exactly what's written in the blog. Another friend did something clever. Since he believes in tech industry's indomitable rise (aka Software eating the world), he uses his stocks to trade stocks of other publicly traded companies. He buys Netflix, Facebook, and stock of other lesser known companies when he's feeling like a gambler.
He treats his stock compensation as bonus. And that has worked well for him. He has a set timeline for when he cashes out, and usually draws a lot of funds only when he's investing that to buy land or house or put that money in indexed funds...
The managers I spoke about have, by my estimates, lost 10x value on the stock grant. They sold too early, too many years back. But they are still at the company. No matter how risk averse you are, that must hurt.
Some stocks are chickens that lay golden eggs.
I wonder if there's a nice mathematical way of maximising income from this.
IMO - its a question of exposure and convexity of your positions moreso than risk. Risk involves predicting the chance that different outcomes occur and...no one is really good at that. However, do you feel comfortable exposing X% of your total assets to the upside of Google growth? If you think in terms of controlling your max loss per opportunity and making sure you're in ones that have significantly more upside than exposure, you don't need to predict correctly quite as much.
As Ramit Sethi likes to argue, the greatest risk in financial management is ending up in analysis paralysis and failing to utilize your energy where you have much more leverage-- improving your own skills and impact. You risk over-allocating yourself not to an investment or sector but to financial greed itself.
Tho, in favor of the OP: GOOG 2012-present has doubled, but well-diversified leveraged funds have had better returns (TQQQ and SVXY are up ~6x).
I've heard that leveraged funds aren't great as long-term vehicles[0]. Even the summary of TQQQ says this:
Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.
Though if you are into market timing, they seem cool.
I have a small part of my savings invested in the company I work for (about 15% or so); it's had 10-25% interest every year for its ten year existence and I have confidence enough in my company. The rest is divided between savings and a traditional bank account (about half, which is still enough to pay the rent and such for a year), and various investment products (some traditional shares, I'm at a few hundred in profit on those if I decide to sell now, and an investment fund that spreads it out over many stocks).
The safe option - stashing it in a savings account - is not worth your while; interest rates on savings account over here have dived below 1% now, which means that you're actually making a loss on them if you add inflation and increased taxes and such to it. Moving part to a higher risk, but higher interest rate is worth it to me. Even if the interest on the investments would be just 2%, it's still better than a savings account.
I have seen people follow this strategy and then the stock goes through the roof. Yes, diversification is generally smart, but seeing all of your colleagues get rich while you make 8% returns can be very difficult emotionally. Therefore, I'd sell most of the grant but keep a significant fraction (maybe 25%) as a hedge.
They joined big companies just a year ago as wet behind the ears, good for very little, graduates. So realistically how much stock are really talking about here? I'm assuming it is pitifully small which is why it was so easy to come to the decision to offload it on a whim.
When I worked for a large internet company I would make about 2-3000 a year in stock options. Years later I could have probably bought a house had I not offloaded them immediately. Had the company done poorly, that money would be gone. I spent it on living expenses. Who's right and who's wrong? The one who ends up ahead of course. Can you tell the future?
The stock market is a gamble and you're not the house. You'll lose if you try to play. Sure you might make some money if you hold on, but only the house (the investment companies) are really guaranteed to win.
If I didn't need that money, I would have placed it into savings, invest in my own company or buy a house or something. Having had a stint as a gambler, I can say that gambling is for fools.
Financially, the right decision is the one with the greater expected value, while accounting for the marginal utility of money. Your understanding of the stock market is fundamentally wrong, owning a stock is owning a piece of a company, a company where people spend most of their lives trying to make a profit, for you, the shareholder. It's a gamble to put all your money on one company, because some companies fail. Buying shares in a large number of companies is the best long term expected value you'll find.
Are there any benefits to stock grants over purchasing stock yourself? I'm assuming there is no transaction cost? If so I'd just treat the grants as part of my portfolio and divest with the money I make from the job.
You have to believe in the company you work for to some degree. If you don't the smarter risk management move would be to move on to another company not to sell your grants.
Nevertheless the overall point is good. You should treat grants as an additional item depending on the same company you draw your income from.
Totally agree on the "risk" assessment. However, when you are young you can take outsized risk for the first few years. A company like GOOG or FB isn't going to implode overnight. The upside scenario is much more likely than the downside. So, I agree with the risk reduction and diversification argument, but I would wait a few years. The benefits of having significant market outperformance in one stock while you're young will carry over into the life of your nest egg.
Is there any advantage in having GOOG stock when you work at Google, rather than selling half of your GOOG stock and buying FB?
I think the expected return would be the same, but it would be less extreme (less likely to be 10x, less likely to be .1x, more likely somewhere in-between).
I think you are making a great point considering the risk of investing in a company that is also paying your salary. To take it a step further you can consider this salary to be an annuity and find the present value. If you look at your portfolio including the present value of your salary, it more than likely emphasize the lack of diversification in your portfolio.
Just as a side note, for your blog, the title shows the hexidecimal value of '. :)
I think, it is not that simple. In your case you have access to a lot more information about the company than most of investors. If you really believe in business that you are in, I think you should keep the stock. If something happened in company, you would be the first one at the door since you live and breathe the company's news.
It's almost insider trading, but legal.
Thousands of Enron employees thought the same as you. They were ruined when their stock went to 0 overnight due to corporate malfeasance that was hidden from them
It may be somewhat foolish to be so heavily invested in a single stock because of risk, but as a newgrad you are about as far away from retirement as you can get, you should be taking on riskier stocks if you have the energy to pay attention to it, that time is now. Gradually shifting to less risky stocks happens withage, hold on to some of those crazy shares now.
Then why not sell your stock grants and buy some competitor shares? Similar risk, more diversification. Also this requires you to pay actual attention, instead of simply believing that "your company is the best company".
Empty advice. Risk is an element no matter where you invest. I expected to read more about risk management or factors to consider, etc. Instead, you're left holding thin air.
Regarding holding employee stock, I consider it as part of an investment strategy that's based on market conditions and personal profile.. much like any other stock.
I surely wouldn't sell for the sake of risk. The premise sounds naive and confusing.
Thanks for the feedback! I do agree that holding employee stock could be part of an investment strategy. This post is geared towards the surprising number of people who hold employee stock as a result of a stock grant and without serious thought on whether they want to invest in their company.
This is incredibly naive. Please don't try to pass off blanket financial advice to others without knowing specifics or having any context on their situation. Different people have different risk profiles.
Also much of the logic in this post just doesn't make sense to be honest.
It's not that naive. When considering your investments, you should consider your employment as part of your investment capital (in investment management this is your "human capital"). It's important to realize that your salary is more like a bond than an equity, but once you've taken that into account the author's thesis is basically correct. You are taking additional risk by investing your financial capital and human capital in the same asset.
It's far more naive to keep your entire investment in your employer than to sell all of it and diversify, even if neither of those is necessarily optimal. It's extremely naive to think that you have special insight into the future returns of a multi-billion dollar publicly traded company when you are a developer one year out of college, just because you work there.
"Imagine that tomorrow the Department of Justice files an antitrust lawsuit against Google. The company is forced to split off into a dozen shards. My entire department is eliminated to cut costs, and I'm without a job. My life savings, held in large part in Google stock, pretty much disappears. The tech sector is in a recession, so I can't find a new job that pays enough to cover rent. My nest egg, my safety blanket, is gone."
It makes it sound as though you are living from paycheck to paycheck aside from your stock grants. It's possible that you are, even, but I think most people working at a big tech company would not be.
How much savings did you have accumulated one year after graduating? It doesn't seem surprising to me that stock grants are a significant part of it, though I can't say I have experience working for a large tech company.
For a recent graduate perhaps it would make sense, but the article doesn't come across as advice for recent graduates. In any case, I think the point is that the advice is applying a simple rule (sell granted stock ASAP) to everyone, seemingly ignoring all circumstances.
Selling granted stock is certainly good advice for someone, but not necessarily for everyone.
It also refers to the stock as nest eggs, though. It suggests that the advice is intended for well beyond the first couple of years.
Overall, it just seems a confused post. The circumstances it envisages are extremely remote, and if there was such a huge change in the industry, a bit of cash that you got from selling your first year's worth of granted stock isn't going to make much of a difference.
