COVID-19 has led to a market fallout arguably more sudden and unexpected than any other economic crisis we’ve experienced in our lifetimes. The second quarter of 2020 is expected to be one of the worst on record, with industries up and down the supply chain — from retailers to restaurants — facing an uncertain future.
For all investors, this is a scary moment, but perhaps even more so for employees of hard-hit companies whose earnings and financial situations are tied up in company stock. Until now, many employees have happily accepted stock-based compensation — partially because it’s often built into pay packages, but also because employees themselves are typically optimistic about the success of their organization and eager to share in the earning opportunity as the company grows and thrives. However, COVID-19 has thrown this confidence into question as the economic environment we’re operating in has been altered.
Like many investors right now, employees are looking closely at their portfolios and wondering what they can doto reduce further negative impact. Their employee stock options will look increasingly like a target for adjustment if they’re seeking to diversify or convert more holdings into cash. Employees in this position should consider the following guidance.
If you don’t have to, don’t move
It’s natural in volatile markets for investors to panic and forget the long-term plan that was created specifically to weather short-term changes like these. While the stock market has been a rollercoaster recently, the general guidance from Wall Street continues to be “wait and see.” Remember that the current situation is a complex combination of a health crisis and its market impact. Before COVID-19, we were in the longest market bull run in history. While there is no denying that the nationwide shutdown will have lasting economic impact, the extent of that impact is not fully known and may play out in ways no one can foresee. This creates a strong impulse for uninformed decision making — an impulse that advisers have been encouraging investors to resist.
In our planning with clients, we typically allot a certain percentage of our client’s entire financial portfolio to certain assets, which include employee stock options. By making it a percentage, it allows us to shift strategy in a holistic manner while keeping the entire portfolio in sight. For example, in volatile times like these, it’s likely that the entire portfolio has dropped in value, but that the percentage allocated to company stock remains relatively the same.
If the percentage allocated to stocks broadly speaking — or company stock, specifically — has been drastically reduced, it’s important to have a discussion with a trusted financial adviser about whether ‘buying the dip’ of the stock is the right move. Employees have an intimate understanding of how an economic situation like the one we find ourselves in may impact their company’s growth but working with someone familiar with market dynamics is best practice. Whatever you do, avoid liquidating your company stock positions based on fear and emotion alone.
Patience is a virtue
Another wrinkle in this situation for employees is that their stock compensation often relies on a vesting schedule, which can exacerbate the knee-jerk reaction of wanting to take action when they have stocks vesting at the same time as a down market. Just because you can do something doesn’t mean you should do it, and if an employee does not have an immediate cash need, then we suggest sitting tight and weathering out the volatility.
Understanding the optics
It’s also worth noting that having a preset vesting schedule can be very valuable in times of extreme market volatility. The optics of Wall Street care about signals of large employee stock sales since that might be interpreted as a sign of the business’ weakness or insider trading. We’ve recently seen news coverage of the owner of the NYSE coming under fire for selling shares of the company in late February, before the extent of COVID-19’s impact had been felt in the U.S. Whether or not the sale was in fact part of a pre-planned schedule (as he claims), it highlights the sensitivity around these actions, and the awareness of how optics will play a role whether you like it or not.
For employees who have stocks vesting in the near term, consider carefully what your holistic financial plan indicates you should do: if you’ve been advised to hold, then let there be a material need for cash before you make the decision to sell your company stock awards. If the plan was already to sell, confirm that the need still exists amid today’s “new normal,” and ensure you have a solid strategy of what to do with the proceeds.
There’s no question that we are in unprecedented times, and that is precisely why you should continue to use your long-term financial plan as the north star when making decisions. Employees should make decisions with their entire wealth strategy in mind instead of examining their company stock options in a vacuum.
